Fiscal policy and income inequality in SA: a quantile regression

Purpose The objective of the research is threefold. First, the study examines the fiscal policy - income inequality nexus in SA. Second, the study addressed the potential asymmetric effects in fiscal policy - income inequality nexus in SA (i.e. we assessed the effects of fiscal policy on income inequality at different quantiles of the income inequality) using secondary data from 1980-2020. Third, the study also identifies the optimal fiscal policy instrument that achieve the greatest distributional objectives. Design/methodology/approach The study adopts the traditional ordinary least square (OLS) and the innovative Quantile estimation techniques. Findings The study found that fiscal policy marginally reduces the income inequality at the lower quantiles (t: 0.05). Specifically, the results show that government spending on health and education reduces income inequality at the lower quantiles (t: 0.05; t: 0.25), albeit exerts a statistically weak impact. On the other hand, the results show that at the upper quantiles, fiscal policy has no statistically significant impact on income inequality. However, we do not find either direct or indirect tax to have any impact on income inequality at any conventional level of significance. This suggests that government spending on health and education have the greater potential to reduce income inequality in South Africa. The research and policy implications are discussed. Originality/value The study addressed the asymmetric phenomenon in income inequality-fiscal policy nexus in South Africa.