Public Redistribution and Inequality in a Period of Fiscal Consolidation: A Decomposition Analysis for Canada in the 1980s and 1990s

Authors


  • This article is based on an update of a previously unpublished paper (Joanis and Rodriguez, 2001), written while the authors were affiliated with Canada's Department of Finance. We are grateful to Tim Sargent for guidance, Chris Worswick, Janice Compton and Keith Horner for helpful comments, and Shlomo Yitzhaki for technology transfer, as well as participants in a Canadian Economics Association conference session, and in a seminar and a workshop at the Department of Finance.

Correspondence: Marcelin Joanis, Université de Sherbrooke, Faculté d'administration, 2500, boul. de l'Université, Sherbrooke, Québec,Canada, J1K 2R1. Email: marcelin.joanis@usherbrooke.ca

Abstract

This article documents the evolution of income inequality during Canada's major fiscal consolidation of the mid-1980s to the mid-1990s, one of the most spectacular fiscal turnarounds in recent economic history. Our main objective is to understand why overall market income inequality rose between 1986 and 1996, while that of disposable income did not. To analyse this question, we use data from the Survey of Consumer Finances and two distinct decomposition methodologies. Our results show that both the automatic stabilisation effect of transfer programmes and the rise in personal income taxes explain the performance of the Canadian tax and transfer system in offsetting market income inequality growth during the fiscal consolidation decade. Canada's fiscal consolidation episode, which placed more weight on rising taxes than on cuts in transfer programmes, was thus an inequality reducing factor.

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