Assistant professor Faculty of Economics, University of Split, Cvite Fiskovića 5, 21000 Split, Croatia
The most recent global economic crisis and the concerns about long-term (un)sustainability of public finances has supported the implementation of budgetary consolidation measures. Although there are relatively large number of papers investigating the impact of fiscal consolidation on different aspect of economy this paper represent unique attempt of investigating the effects of fiscal consolidation on regional inequalities. We test the hypothesis that in the period of fiscal consolidation, when some spending cut and/or tax hikes, less developed regions are not in position to protect themselves against undesired redistributive policies which put them in more disadvantaged position and increase regional inequalities. In empirical part of the paper we explore the impact of fiscal consolidation on regional inequalities on national levels among 13 EU member countries for period 1995-2009. Two groups of variables are particularly important for this study: measure of regional inequality and fiscal consolidation. Due to fact that recent literature recognizes problems with using cyclically-adjusted primary budget balance (CAPB) as a measure for fiscal consolidation we extend regional empirical literature by using a new database of fiscal consolidation that successfully tackles all this issues. The results indicate that fiscal consolidation led by tax hikes increases regional inequalities and that fiscal consolidation led by spending cuts doesn’t have significant influence on regional inequalities. Finally, the paper highlights that fiscal consolidation is not only the matter of the public debt levels or economic growth, but also important regional issue.
Keywords: Regional inequalities, Fiscal consolidation, European Union
JEL classification: R12, E62, H23