Austerity, inequality and politics

- We analyze the effect of fiscal adjustments on income inequality.
- Type of government matters while impact of ideology is insignificant.
- Austerity measures by coalition governments reduce inequality.
- This holds even if adjustments are successful or expenditure based.

We analyze the effect of budget consolidation on income inequality in 17 OECD countries while controlling for political and ideological differences. We find that the impact of fiscal adjustments on the Gini coefficient does not depend on the political party in power, but on the type of government. Austerity measures by coalition governments significantly reduce income inequality when compared with single party and minority governments, even when they are successful or expenditure based. While coalition governments are less successful in reducing structural budget deficits, they perform much better in terms of addressing distributional concerns.