Introduction
Inclusive growth refers to economic expansion that benefits all segments of society, particularly lower-income groups, while fiscal sustainability ensures that government policies remain financially viable in the long run. To pursue these goals, governments can either raise tax revenue, particularly from higher-income individuals, to redistribute wealth and fund social programmes, or raise productivity to drive long-term growth and improve wages. Raising tax revenue can directly reduce inequality and strengthen public finances but may discourage investment and reduce efficiency. Raising productivity can deliver sustainable, broad-based expansion that lifts incomes and revenues without additional tax burdens. Both have strengths and limitations, making a balanced strategy necessary.
Raising tax revenue can achieve inclusiveness and fiscal sustainability but may worsen growth
One method of increasing tax revenue is higher taxation on high-income individuals, which can directly reduce inequality. By raising income-tax rates for higher earners, the post-tax income disparity narrows, lowering the Gini coefficient, a key indicator of inequality. The additional revenue can fund social programmes, education and healthcare subsidies, improving access to essential services for lower-income groups and making growth more inclusive. From a fiscal-sustainability perspective, higher tax revenues improve the government's budget position, reducing deficits and ensuring long-term stability.
However, raising tax revenue carries drawbacks. Higher taxation on high earners and businesses may discourage investment, entrepreneurship and capital formation, slowing growth. If high earners face significantly increased burdens, they may relocate or shift wealth elsewhere, causing capital flight and lower revenues in the long term. Higher corporate taxes could reduce firms' incentives to expand, lowering job creation and wage growth and undermining inclusive growth. Excessive reliance on this approach therefore risks stifling expansion and reducing incentives for wealth creation.
Raising productivity can achieve inclusive growth while maintaining fiscal sustainability
Raising productivity is a long-term strategy that enhances efficiency, increases output and improves workforce skills, delivering sustained, broad-based growth. Investment in supply-side policies such as technology adoption, automation and upskilling raises productive capacity, shifting long-run aggregate supply (LRAS) rightward from AS0 to AS1 and lifting potential growth. Higher productivity raises wages and employment opportunities, especially if efforts are made to reskill low-income workers, which helps reduce inequality by enabling lower-skilled workers to earn more. Sustained expansion raises corporate profitability and wages, which naturally increases tax revenue without tax hikes, so the government can improve fiscal sustainability without discouraging private investment.
However, supply-side policies take time to yield results, making them less effective for immediate fiscal challenges. If productivity gains accrue mainly to high-skilled workers, inequality could worsen as low-skilled workers are left behind. There is no immediate guarantee that gains translate into equitable wage increases, requiring government intervention to ensure inclusive distribution.
Evaluative conclusion: a balanced approach is necessary
Both tools offer distinct advantages and challenges. Increasing tax revenue, particularly from higher-income individuals, immediately reduces inequality and strengthens public finances, but may discourage investment and limit future growth. Raising productivity fosters sustainable growth and organically increases revenue, reducing the need for tax hikes, but takes time and requires targeting to ensure inclusivity. Given these trade-offs, a balanced approach is most appropriate. Progressive taxation should be implemented carefully so that increases do not significantly discourage investment, while supply-side policies should be targeted at upskilling lower-income workers so productivity gains translate into wage growth across all income levels. By combining moderate tax adjustments with investment in productivity-driven growth, governments can achieve a more inclusive and fiscally sustainable economy that benefits both present and future generations.