Impact of Fiscal Adjustment on Income Distribution in Pakistan

This study provides a quantitative assessment of selected fiscal adjustment policies on income distribution in Pakistan. Using a latest social accounting matrix for the year 1989-90 and the static fixed-price model, various simulation exercises have been performed. The results show that reduction in subsidies has more adverse impact on the incomes of the richest rural and urban households, implying that the richest people in the country are the greater beneficiaries of subsidies provided by the government. The evidence also suggests that a contraction in government current spending appears to have a negative impact on the incomes of all urban and rural household groups but the largest reduction appears in the income of the richest rural, followed by the poorest urban. The simulation results indicate that a decline in public expenditure on education and health affects the poorest urban and poorest rural more than the relatively better-off urban and rural income groups. Further, the estimates of Gini-coefficients show that reduction in consumption subsidies improves income distribution in both rural and urban areas of Pakistan. Conversely, reduction in subsidies on production worsens income distribution both in urban and rural areas, while reducing overall govemment current expenditure leads to deterioration of income distribution in urban areas but improves it in rural areas marginally. Similarly, reduction in govemment expenditure on education and health adversely affects income distribution in both urban and rural areas of Pakistan.