Publication: From Policy to Impact: Fiscal Incidence Analysis in Armenia
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2025-06-16
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2025-06-16
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Over the past two decades, Armenia's economy has undergone significant transformation marked by periods of rapid growth, external shocks, and resilience. From 2000 to 2008, Armenia transformed into one of the Europe and Central Asia region's most rapidly growing economies, with average annual growth in gross domestic product (GDP) exceeding 10 percent, mainly driven by remittances, a construction sector boom, and investments. This fiscal incidence analysis (FIA) establishes a baseline for assessing current fiscal policies and identifying reforms to enhance fiscal equity and sustainability. Utilizing the Commitment to Equity (CEQ) methodology, it analyzes how public expenditures and taxes affect various population groups, tracking changes in household income distribution from market income (before taxes and transfers) to final income. The report highlights the impact of fiscal policies, such as taxes, transfers, and social spending, on income inequality and poverty. It also informs the Sustainable Development Goals indicator 10.4.2, which measures the redistributive effects of fiscal policy. By identifying spending priorities that reduce poverty and inequality, the FIA explores strategies to create fiscal space without disproportionately impacting poor and vulnerable households. The FIA results indicate that Armenia's fiscal policy is effective in reducing poverty, but requires further reforms to maximize its potential, including measures to address regional disparities in its impact on poverty and inequality reduction. The net impact of fiscal policy on poverty is positive, reducing the national poverty headcount by 2.4 percentage points when comparing market income to consumable income. The reduction in poverty is driven by the combined impacts of pensions and other direct transfers, decreasing the poverty rate by 9.8 percentage points, going from market income to disposable income. However, these gains are partially offset by the adverse effects of indirect taxes and subsidies, which increased the poverty rate by 7.4 percentage points. The impact on poverty and inequality also varied across regions, warranting further research to explain the gap. The analysis offers valuable guidance for crafting a unified set of fiscal policies to help the government and stakeholders address the country’s demographic and fiscal challenges, laying the foundation for more prosperous, equitable, and sustainable growth. A key focus should be increasing investment in human capital, particularly by boosting funding for education and health care, to promote greater equality of opportunity. Enhancing the quality of these services and addressing spatial disparities in access are crucial to ensuring that development gains are equitably distributed across all regions.
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“World Bank. 2025. From Policy to Impact: Fiscal Incidence Analysis in Armenia. © World Bank. http://hdl.handle.net/10986/43341 License: CC BY-NC 3.0 IGO.”
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