Working paper

The economic growth and income distribution implications of public spending and tax decisions

European Union countries can reduce inequality of opportunity through public spending and tax decisions. Broadly, the most effective approach includes

Publishing date
19 October 2020
Zsolt Darvas

The level and composition of public expenditures and revenues both have implications for economic development, as shown by the ‘fiscal multiplier’ and the ‘quality of public finance’ literature. Public finance decisions also influence the distribution of income. Based on a review of the literature, I argue for a fair distribution of income as reflected in low-income inequality, not particularly because of the impact of income inequality on long-term growth (which is a controversial issue), but primarily because income inequality typically implies inequality of opportunity. European Union countries have very diverse public finance structures and different levels of effectiveness and there is room for improvement in the growth and equality impacts in all countries. A general guideline would be that the most effective approach comprises progressive taxes and inheritance taxes, spending on education, health and public infrastructure, and better government effectiveness. At the height of the 2008 global crisis and the subsequent European financial and economic crises, the fiscal consolidation strategies of EU countries largely relied on cutting public investment and social spending (except pensions), which is the opposite of what is suggested in the literature. Better fiscal rules and good fiscal institutions are needed to safeguard growth- and distribution-friendly expenditures in a crisis.

Recommended citation:

Darvas, Z. (2020) 'The economic growth and income distribution implications of public spending and tax decisions', Working Paper 2020/05, Bruegel

About the authors

  • Zsolt Darvas

    Zsolt Darvas is a Senior Fellow at Bruegel and part-time Senior Research Fellow at the Corvinus University of Budapest. He joined Bruegel in 2008 as a Visiting Fellow, and became a Research Fellow in 2009 and a Senior Fellow in 2013.

    From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

    Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

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