Fiscal policy measures needed to redistribute income

Inequality in income distribution in Sri Lanka has increased continuously according to statistics published by the Department of Census and Statistics (DCS) and analysts warn this would lead to social issues unless appropriate fiscal policy measures are taken to redistribute income.

The percentage share of household income of the poorest 20 percent of the population has declined from 5.4 to 4.4 from 1995-96 to 2012, according to the household income and expenditure survey data.

The percentage of household income of the richest 20 percent of the population has increased from 50.3 percent to 53.5 percent while the share of the household income of the middle income group declined from 44.5 percent to 42.1 percent.

According to the 2012 survey the poorest 40 percent of the population receive only 13.3 percent of the total household income of the country.

The Gini coefficient which measures inequality too has increased from 0.43 to 0.49 in 2009-10 and declined to 0.48 in 2012. To support sustainable economic growth, redistribution should be done with fiscal instruments that achieve distributional objectives at minimum cost to economic efficiency.

An IMF survey report published last week said that growing inequality is a global issue and in recent years it has put increased pressure on fiscal policy to redistribute income.

“While the question of just how much redistribution the state should do, in the end, rests with national governments, the design of the policies themselves has a critical bearing on efficiency and growth,” the report said.

According to the report over the past three decades, inequality has increased in most countries. “While the level of inequality has declined in Latin America and sub-Saharan Africa recently, what is striking is the persistent differences across regions, with Latin America still having the highest inequality and the advanced economies having the lowest”.

More recently, attention has been drawn to the rising share of top income earners. However, the trend across countries appear mixed.

In some economies, such as the United States and South Africa, the share of the top one percent has increased dramatically in recent decades, but not so in continental Europe and Japan, where it has remained largely unchanged.

There are differing views of the causes of the rising share of the top one percent. Some say it is the impact of globalisation and new technologies, while others highlight policy choices, such as reductions in tax rates and the rent-seeking behaviour of executives, the report said.

- GW