Fiscal policy

Asians are calling on the government to play a more activist role in bringing about a fairer society, which provides opportunities for all and distributes the fruits of growth more widely.

Still, governments both rich and poor need to be careful how they go about that. While fiscal policy can reduce inequality from either the spending or the revenue side, evidence suggests that the impact from public spending is significantly greater.

As economists like Iris Claus note, the two main lessons from the broader literature for developing Asia are that fiscal expenditures, not taxation, offer the most effective means of lowering inequality and that the public spending best able to reduce inequality is on education and health care.

Their analysis of data from 150 countries spanning 1970–2009 shows that, despite tax systems tending to be progressive, government expenditures are more effective at redistributing income.

Government expenditures in developing Asia are small.