IMF: Fiscal Policies Can Bridge Income Inequality Gap

MARKET INDICATOR

By Nume Ekeghe in Washington DC

The International Monetary Fund (IMF) has revealed that income inequality among people around the world has been declining in recent decades. 

This, the fund stated, was due to countries like China and India’s incomes catching-up to advanced economies. However, it pointed out that inequality has increased, particularly in advanced countries.

The fund stated this in its new Fiscal Monitor, released on the sidelines of the just concluded IMF/World Bank annual meetings in Washington DC.

“But the news is not all good. Inequality within countries has increased, particularly in advanced economies. Since the global economic recovery has gained pace and is now widespread, policymakers have a window of opportunity to respond with reforms that tackle inequality, and our new Fiscal Monitor shows how the right mix of fiscal policies can make the difference.

“Fiscal policy accounts for a large share of differences in inequality across countries. In advanced economies, fiscal policy offsets about a third of income inequality before taxes and transfers—commonly known as market income inequality—with 75 percent coming from transfers,” it added.

The report noted that spending on education and health also affects market income inequality over time by promoting social mobility, including across generations. In developing economies, it further noted that fiscal redistribution was much weaker, given lower and less progressive taxes and spending.

“There is no one-size-fits-all strategy. Redistribution should reflect a country’s specific circumstances, including underlying fiscal pressures, social preferences, and the government’s administrative and tax capacity. Also, taxes and transfers cannot be considered in isolation. Countries need to finance transfers, and the combination of alternative tax and transfer instruments that countries chose can have very different implications for equity.

“While some policies may have conflicting effects on growth and distribution, our empirical evidence shows it is possible to achieve inclusive, sustainable growth with the right mix of policies. Efficiency and equity can and must go hand-in-hand,” it added.

According to the report, policymakers have many choices to achieve efficient and equitable results.

 The Fiscal Monitor focuses on three policy debates: progressive taxation, universal basic income (UBI), and public spending on education and health,

It showed that personal income tax progressivity had declined steeply in the 1980s and 1990s, and had remained broadly stable since then.

 The average top income tax rate for OECD member countries fell from 62 per cent in 1981 to 35 percent in 2015. In addition, tax systems were less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief.

“Importantly, we find that some advanced economies can increase progressivity without hampering growth, as long as progressivity is not excessive. A UBI, defined as a cash transfer of an equal amount to all individuals in a country,has been widely debated by economists for decades.

“There is now renewed interest, associated with perceptions of the effects of technology and artificial intelligence on the future of work. The Fiscal Monitor does not advocate for or against UBI, but contributes to the policy debate by presenting facts and arguments relevant for evaluating a UBI.

“A UBI has potential for having a significant impact on inequality and poverty as it covers all individuals at the bottom of the income distribution. But, being universal means it is costly,” it added.

The Fiscal Monitor estimated that it would cost the average advanced economy 6½ per cent of GDP to provide a UBI set at 25 percent of median per capita income, and the estimates vary considerably across countries.

Thus, the discussion of a UBI cannot be disentangled from a discussion of its financing to make it budget neutral. Key considerations for its introduction, it stated, were its consistency with other fiscal priorities-to avoid crowding out investments in infrastructure, education and health, for instance-and the method of financing, which needs to be efficient and equitable.

The report noted that a UBI could be an option where it substitutes for inequitable and inefficient social spending.

“Despite progress, gaps in access to quality education and health care services between different income groups in the population remain in many countries. For example, in advanced economies, males with tertiary education live up to 14 years longer than those with secondary education or less.

“Better public spending can help, for instance, by reallocating education or health spending from the rich to the poor while keeping total public education or health spending unchanged. The Fiscal Monitor finds that closing the inequality gap in basic health coverage could raise life expectancy, on average, by 1.3 years in emerging and developing countries,” it stated.

 

Recognition for Emefiele

The Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele has urged global investors to take advantage of huge opportunities in the Nigerian economy, saying the environment is good for investment.

Emefiele spoke just as Forbes Magazine bestowed on him the Forbes’ 2017 ‘Best of Africa Achievement’ award in Washington DC. Emefiele, in his remarks after receiving the award, told his audience that Nigerians are hospitable and good people, saying “that is why we make bold to say Nigeria is good for business.”

He added: “There are very big countries in the world you will visit today and say you want to invest. The returns are not as high as you have in Nigeria. We want to invite you. That for me is the message we have here today. Come to Nigeria, Nigerians will receive you.

“Come to Nigeria, you will be happy in Nigeria. We are battling with unemployment in Nigeria, and that is the reason again the President called on the Federal Ministry of Agric, CBN, Minister of Employment, Labour and Productivity, and some important stakeholders including the governors together and said there was a need to start thinking about how we can create jobs for our people through agriculture; that agriculture should not be seen as business that is meant for the poor, that you can make money from agriculture.

“Countries that have progressed have done so because they took the agriculture sector very seriously. We are determined to make agriculture the sector where people make money and we have decided to put in place the Anchor Borrowers Programme (ABP).

Renewable Energy

Nigeria has requested the World Bank Group and the International Monetary Fund (IMF) to scale up the provision of and access to renewable energy in order to deliver development results and meet global climate goals.

Nigeria’s position on renewable energy and regional integration was presented by the Minister of Finance, Mrs. Kemi Adeosun, during the G24 Finance Ministers and Central Bank Governors meetings at the annual meetings. Adeosun stated that scaling up renewable energy was a “win-win area” to deliver development results and contribute to the global climate goals.

She said: “We have a major energy infrastructure gap to meet the needs of industrialisation. Providing access to energy to all parts of Nigeria, both urban and rural, is a priority. If we succeed, we estimate that this could unleash the development potentials of two-third of our population of 180 million.”

The minister added that generation of renewable energy was a financially attractive option for reaching rural populations. She further emphasised the need for business models from other countries to serve as a template in the provision of affordable energy.

Investment in Human Capital

Worried about the Nigeria’s abysmally level of investment in human capital development, particularly in health, education and social protection, with healthcare getting a spend of less than one per cent of the GDP, the World Bank has concluded plans to massively invest in the country’s manpower.

President of the World Bank Group, Mr. Jim Yong Kim, disclosed this while responding to a question. Kim urged policy makers in Nigeria to look beyond oil prices and start to develop strategies that would ensure sustainable growth for the economy.

“Over this next year, not only in Nigeria but in all of Africa. We are going to focus on accelerating investments in human capital we call it but investments in health, education, social protection, so that Africa can prepare itself for the next phase in economic development,” Kim said.

“You know, in my very first meeting with President Buhari, he said specifically that he would like us to shift our focus to the northern regions of Nigeria and we’ve done that. Now, it has been very difficult. The work there has been very, very difficult. I think Nigeria, of course, has suffered from the dropping oil prices. I think things are just now getting better. But the conversation we need to have with Nigeria, I think, is in many ways, related to the theme that I brought to the table just this past week which is, investment in human capital. The percentage of GDP that Nigeria spends on healthcare is less than one per cent,” he explained.