Fiscal Policy and Its Role in Reducing Income Inequality: A CGE Analysis for Pakistan

This Study analyses the link between fiscal policy and income distribution. We use a simple Computable General Equilibrium model (CGEM-Pak) adapted from Lofgren, et al (2001). Our CGE model takes into account the market interaction that is the effects of pricing outcomes of one market in other markets and its effects, in turn creating ripples throughout the whole economy, even to the extent of affecting the price-quantity equilibrium in the original market. This study uses Social Accounting Matrix (SAM) 2002 as developed by Dorosh, et al. (2006). To explore the impact of fiscal policy measures on income inequality, simulation exercises are performed, while the budget deficit is not allowed to increase in the set of simulations. Further, we examine the inequality effects using Theil T, Theil L, Theil S and Hoover's Indexes. Our results show that a policy mix of sales tax, income tax and government expenditures helps us to reduce income inequality; while, at the same time it lessens the economy's financial dependency.