Fiscal Policy and Income Inequality: A Growing Concern for Less Developed Countries

International Journal of Research and Innovation in Social Science (IJRISS) | Volume II, Issue X, October 2018 | ISSN 2454–6186

Fiscal Policy and Income Inequality: A Growing Concern for Less Developed Countries

Samuel B. Adewumi¹, Chinedu J. Ogbodo², Yakubu A. Aca³, Ngozi B. Enebe⁴

 ^1,2,4 Department of Economics, University of Nsukka, Nigeria
³Department of Accounting, A.B.U Zaria, Nigeria

Abstract:-This study examines fiscal policy and income inequality in Nigeria using data from 1981 to 2017. The variables of interest are income inequality (proxy by Gini coefficient), government social expenditure, government economic expenditure, real GDP, education (proxy by secondary school enrolment) and government tax. The result shows that income inequality Granger-causes government economic and social expenditure without a feedback, while education granger caused income inequality without a feedback. This means that government expenditure only respond to income inequality, while education causes a change in income gap. The impulse response function shows that shock in real GPD and education causes an upward trend in income inequality, while shock in government social and economic expenditure does not show any impact on income inequality. Also, government tax only shows an impact on income inequality in the first and second period, and its impact towards the other period are not so significant. We therefore conclude that fiscal policy through government expenditure has no significant impact on income redistribution in Nigeria, and the only fiscal variable that can achieve income redistribution is tax – which must also be used with cautions.

Key words: Income inequality (Gini coefficient), fiscal policy and economic growth.

I. INTRODUCTION

The disparities in income inequality in most less developed countries, over the years, has increase the growing concern of policy makers, researchers and other agencies’, as income inequality had been viewed as a devastating force to economic growth and development of any nation (Hirschman and Rothschild, 1973; Baumol,1973; Hall, 2001; Marmot, 2005; Marmot, Friel, Bell, Houweling and Taylor, 2008). High income inequality had also been seen to have adverse effect on social cohesion, well-being, as well as limiting a country’s ability to achieve sustainable economic growth and development(Cattell 2001; Stiglitz, 2002; Helliwell and Huang, 2008; Veenhoven, 2008). According to Stiglitz(2012), Inequality undermines the strength of an economy and contributes to economic instability. The major concern on this issue this is the continuous widening in income gap between the poor and the rich, as well as the presence of policy mismatch that addresses the problem of poverty in less developed countries (LCS’s)(Atkinson, 1970; Sala-i-Martin,2002;Godfray et al. 2010; Reardon, 2011).

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