Impact of Public Expenditure on Income Inequality in Some Selected East and South Africa countries: A Dynamic Panel Data Approach

Abstract

Economic growth which promotes equity is an important macroeconomic objective countries try to achieve. In achieving this objective, government policies are expected to have great role. However there is no consensus about how these policies are contribute to income inequality. In this research we tried to explore the impact of government expenditure, which is one component of Fiscal policy, on income inequality in selected East and South Africa countries. Specifically, by looking at the impact of aggregate government expenditure, which is proxied by government consumption expenditure as a percentage of GDP, on income inequality was analyzed for 18 countries using data spanning from 2000-2015. In addition to this, impact of disaggregated public expenditure by sector (education, health and agriculture expenditure) on income inequality was examined for 13 countries using the data from 2000 - 2012. Dynamic Panel Data System GMM estimation was conducted for the econometrics analysis of Dynamic fixed effect model. Accordingly, government consumption expenditure is found to have significant positive effect on income inequality in these countries. Furthermore, the finding shows that government expenditure on education as a percentage of GDP and government expenditure on health as a percentage of GDP have no significant impact on income inequality while expenditure on agriculture as a percentage of GDP is found to have significant positive effect on income inequality. From these we conclude that government consumption expenditure and government expenditure on agriculture played negative role in decreasing income inequality by aggravating its level. So, policy makers in these countries have to consider a way these government expenditures will have to be used to improve distribution of income in line with direct redistributive mechanisms.