Only fiscal policy can solve

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

***Note: this report distinguishes between “governments” in charge of fiscal policy and “central banks” in charge of monetary policy***

Structural inequality

Addressing the structural trends in inequality is first and foremost a task for governments. They can avail themselves of a better and broader set of tools to tackle inequality, ranging from taxation to transfers as well as to policies aimed at improving education, property rights, health, competition and trade, among others. Moreover, politically, governments bear the responsibility for achieving a desirable distribution of resources.

Fiscal policy is best suited to offset the distributional impact of long-term real factors. Government spending and support programmes, such as unemployment benefits and retraining, can help the most disadvantaged cope with adverse structural forces. More generally, tax and transfer systems can be calibrated and targeted to redistribute income and wealth across different segments of the population (Box II.E). In AEs, such policies have indeed contributed to mitigating income inequality. Measures of income inequality based on the Gini coefficient are typically much higher pre- than post-taxes and transfers (Graph II.11, left-hand panel). The difference is more limited in EMEs (right-hand panel), one possible reason being the lower share of direct taxes in those jurisdictions.