The Impact of Government Budget Allocation (Capital and Recurrent Expenditure) on Income Inequality across the Provinces (Case Study of Iran)

The Income inequality in Iran is mainly influenced by government policy, in particular through budget allocation. This study aims to investigate how the government budget (capital and recurrent expenditure) has impacted on income inequality across the provinces in Iran. Data used in this study pertain to period 1379- 1398, corresponding to Gregorian calendar (2000 - 2019), and the same has been utilized by employing the Panel Smooth Transition Regression Model (PSTR) to analyze the relationship between government budget allocation and income inequality. The results of the model estimation suggest that government budget allocation (capital and recurrent expenditure) has meaningfully reduced income inequality across the provinces in Iran. These findings align with previous research conducted by Milanovich, Khan and Bashir and Wood, D’Onofrioa et al(2019), which support Kuznets' hypothesis that government budget allocation initially exacerbates income inequality, but over time, with the implementation of supplementary policies, income distribution can improve.  In addition to government budget, factors such as level of education (literacy rate), labor participation rate, trade expansion (state trading) have a significant equalizing impact on income distribution. By pursuing a well-targeted foreign trade policy in which economic entrepreneurs and stakeholders benefit from trade expansion, government can pave the way for income inequality to mitigate across the provinces.