Revisiting Fiscal Policy and Income Inequality in the Context of Economic Complexity

This study investigates the impact of fiscal policy and economic complexity on income inequality using panel data from 79 countries over the period 2002–2022. Employing both the SGMM and Bayesian regression, the analysis provides robust evidence on their intertwined effects. The results reveal that economic complexity and government expenditure tend to exacerbate inequality, while tax revenue serves as a strong mitigating factor. Interestingly, when fiscal expenditure interacts with economic complexity, the combined effect significantly reduces inequality with a posterior probability of 100%, highlighting the corrective role of fiscal policy in complex economies. Beyond these core findings, control variables such as GDP per capita, unemployment, inflation, and trade openness are shown to worsen inequality, whereas foreign direct investment and institutional quality help narrow it. By integrating frequentist and Bayesian approaches, this research contributes to a more nuanced understanding of the mechanisms through which fiscal tools and structural economic characteristics jointly shape inequality. The findings underscore the importance of aligning fiscal strategies with economic complexity to promote equitable growth. Policymakers should prioritize redistributive spending, strengthen tax systems, and tailor interventions to the structural dynamics of their economies to effectively address income disparities in an era of globalization and rising complexity.