Fiscal policy as an instrument for reducing income inequality: case of Latvia

Abstract

With the help of fiscal policy, government may influence both overall demand and the disposable income of the population, as well as solve social equality challenges in the society by allocating income among different groups of population. Income inequality in Latvia, which is expressed by the Gini index of disposable income, is the third highest in the European Union, so the question about the most effective instruments for reducing income inequality is pressing. Inequality results in reduced efficiency of social capital and economic distribution, worsening of population health indicators, rising social tension, increased crime and rising poverty, which can have a negative impact on long-term economic growth. The objective of the research is to evaluate how fiscal policy has influenced income inequality in Latvia by using the Gini index based on disposable income and the Gini index based on market income. Results of the research indicate that the Basic Guidelines of the State Tax policy 2018-2021 have not been an effective instrument of fiscal policy to reduce income inequality; according to actual data income inequality in Latvia in 2018 has increased by 3.2% compared to 2017. Thus, to reduce income inequality the use of benefits policy is required, including Means-Tested benefits, which are only granted to people with the lowest income.