Fiscal Policy, Economic Growth and Income Inequality: The Case of Portugal

This research estimates the impact of fiscal policy (approximated by the ratio of public investment to government consumption and the shares of direct and indirect tax revenues in GDP) on economic growth and income inequality in Portugal during 1995–2025. The study uses annual data and autoregressive distributed lag (ARDL) models that account for trade openness, corruption control, and tourism. The empirical results indicate that, in the long term, Portugal’s growth is affected by corruption control and tourism, while in the short term, it is affected by the ratio of government investment to government consumption. The results also show that income distribution in Portugal is influenced by corruption control, indirect tax revenues, tourism, and trade openness in the long run, and by direct tax revenues, tourism, and trade openness in the short run. Interestingly, while Portugal’s economic growth depends on the structure of government expenditures in the short term, income inequality depends on direct taxes in the short run and on indirect taxes in the long run. This suggests that foreign trade, corruption control, and tourism are key determinants of economic growth and income distribution in Portugal, underscoring the importance of economic freedom and institutional quality for economic well-being and social resilience.