POL ICY BRIEF Does fiscal policy have a role in improving child well-being in Ethiopia? Alemayehu A. Ambel,* Getachew Yirga Belete† and Oliver Fiala‡ Taxes, government spending, and public transfers affect the well-being of children and adults, albeit in different ways. There is, however, a dearth of empirical evidence on the impact of these policies on the well-being of children in low-income countries. This policy brief summarizes a recent study by Ambel, Belete, and Fiala (2024), which investigates the effects of fiscal actions on poverty and inequality among children in Ethiopia. The study applies the Commitment to Equity for Children (CEQ4C) methodology on survey data integrated with administrative data. It finds that the fiscal system in Ethiopia is progressive, poverty-reducing, and equalizing for children. However, there are observed differences in the effects of some of the fiscal policy components, as many of these effects are stronger for girls and children in rural areas. The study also highlights the essential role of public services in improving children’s well-being. Affiliations: * Development Data Group, World Bank † Department of Economics, Bahir Dar University ‡ Global Policy, Advocacy & Research Department, Save the Children UK Disclaimer: The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the organizations with which they are affiliated. 1 Does fiscal policy have a role in improving child well-being in Ethiopia? POLICY BRIEF INTRODUCTION In 2022, one in five children in Ethiopia lived been widely used to analyze the distributional in extremely poor households, measured as effects of fiscal policies in many low- and middle- those living below $2.15 PPP (Salmeron-Gomez income countries but its focus on children is et al. 2023). UNICEF and the Central Statistical relatively new (Cuesta, Jellema, and Ferrone 2021; Agency of Ethiopia estimated that in 2016, Save the Children 2021; Bornukova et al. 2020; about 36.2 million children in Ethiopia were Save the Children 2022). The study answered the multidimensionally poor, i.e. they were deprived following questions: of the fulfillment of multiple rights or needs for 1. How do the burdens of taxation and the benefits basic food or services (CSA and UNICEF Ethiopia from government transfers and spending differ 2018). Child poverty varies significantly within the between children living in rural and urban country, both between rural and urban areas, as settings, between boys and girls, and between well as between regions. In Addis Ababa, 18% poorer and richer children? of children were considered poor, however, this 2. What is the contribution of government rate is higher than 90% in more remote regions. transfers, spending, and taxes to the Taxes, government spending, and public reduction of inequality and child monetary transfers play an important role in reducing and multidimensional poverty? poverty and inequality. Direct taxes (such as 3. How do potential changes to the social income tax) and indirect taxes (such as VAT or transfer system affect poverty and inequality excise taxes) reduce a household’s income and among children? consequently, consumption. On the other hand, these revenues allow governments to provide DATA AND METHODOLOGY cash transfers and run essential services, such as health and education. Taxes and transfers The Commitment to Equity for Children (CEQ4C) both affect the distribution of income in society framework (Cuesta, Jellema, and Ferrone 2021; and therefore, inequality. Inchauste et al. 2017; Lustig 2018) combines Taxes and transfers impact children in a household survey data with administrative data different way from adults, as children have on government budgets and tax policies. First, different demands and consumption patterns. the methodology requires calculating the pre- However, the effects of these policies on children fiscal and post-fiscal income concepts: market haven’t been extensively studied (Cuesta, Jellema, income, disposable income, consumable income, and Ferrone 2021). For example, children could and final income. While the underlying household be disproportionately affected if taxes add to the survey captures disposable income using cost of goods and services particularly relevant consumption expenditures as a proxy, backward to them. and forward calculations are needed to develop A recent study by Ambel, Belete, and Fiala the other income concepts. This study focuses (2024) investigates these issues in the context on the individual child as a unit of analysis and of Ethiopia, using the Commitment to Equity for therefore allocates expenditures to individual Children (CEQ4C) framework. This approach has household members based on consumption 2 Does fiscal policy have a role in improving child well-being in Ethiopia? POLICY BRIEF patterns, available individual-specific information of GDP, with more than half (57%) obtained in the survey, and equivalence scales. A range through indirect taxation. Government spending of assumptions were used when assessing the was equivalent to 20.8% of GDP, the majority fiscal incidence for children, i.e. unit costs of (39%) of which went towards social development, education and health services, or how the tax followed by economic development (33%) and burden is shared by the household. general services (18%). Second, the CEQ4C methodology calculates poverty and inequality for each income concept. RESULTS The study estimated both monetary poverty (using FGT indices) and multidimensional child On average, the study finds the fiscal system in poverty (adapting the AF methods). The latter Ethiopia to be progressive and fair, and one that was developed using four dimensions (child reduces monetary and multidimensional child education, child health, water and sanitation, poverty. However, there are important differences and housing and assets) and ten indicators. in the distribution of different kinds of taxes and Inequality was measured using the Theil index. expenditures. Indirect taxes, e.g. VAT and excise To comprehend the potential effects of changes taxes are regressive and account for more than in the existing fiscal regimes, the study conducts two-thirds of taxes relevant to children, which four child-relevant policy simulations, focusing means taxes make up a higher share of income on universal education and the productive safety for families with children who have deprivations net program (PSNP). (Fig. 1). In contrast, direct taxes, such as income The major source of data for the study is tax, are progressive. the Ethiopia Socioeconomic Panel Survey (ESPS) On the transfer side, direct transfers (such 2018/19. ESPS is a nationally representative as cash transfers) and indirect in-kind transfers survey implemented by the Ethiopia Statistical (spending on social services and in the case of Service in collaboration with the World Bank’s Ethiopia, predominantly on education) are found LSMS-ISA project. The survey included 6,700 to be progressive (Fig. 2). Spending on primary households, of which 4,992 households had at education is progressive, which means transfers least one child (0-17 years) at the time of the account for a higher proportion of the incomes interview. The final data was based on a sample of of families with children who have deprivations. 13,820 children. The survey data was mainly used In contrast, secondary education spending is to calculate the incidence of both spending and regressive, as children from poorer backgrounds revenue-generating activities, as well as poverty are often less likely to attend secondary and inequality statistics. schools – a finding in line with comparable The study complements the survey data, studies in other countries (Cuesta, Jellema, and with administrative data obtained from various Ferrone 2021; Save the Children 2021). Overall, ministries and their subsidiary agencies. These public spending on health is progressive. While include public revenues and expenditures for the the study does not find significant differences in 2018/19 fiscal year, school enrollment, kerosene incidence by gender, there are noted differences subsidies, and wheat subsidies. The data shows between rural and urban areas. In rural areas, that revenue collection was equivalent to 13.5% primary education and health spending are 3 Does fiscal policy have a role in improving child well-being in Ethiopia? POLICY BRIEF neutral and do not show the progressivity seen transfers need to be compared across different in urban areas. stages of the fiscal system (before and after To understand the full effect of fiscal policy different taxes and transfers). In Ethiopia, the on poverty and inequality, both taxes and study finds that the fiscal system reduced Figure 1 Taxes as percent of market income by child deprivation status, gender and location BOYS GIRLS RURAL URBAN 6 Tax to market income ratio (%) Tax to market income ratio (%) 6 4 4 2 2 0 0 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 Count of multiple deprivations Count of multiple deprivations Direct taxes VAT Excise Direct taxes VAT Excise Source: Ambel, Belete, and Fiala (2024). Figure 2 Transfers as percent of market income by child deprivation status, gender and location BOYS GIRLS RURAL URBAN 20 30 Transfer to market income ratio (%) Transfer to market income ratio (%) 15 20 10 10 5 0 0 0 5 0 5 0 5 0 5 Count of multiple deprivations Count of multiple deprivations Direct transfers Primary education Direct transfers Primary education Secondary education Health Secondary education Health Source: Ambel, Belete, and Fiala (2024). 4 Does fiscal policy have a role in improving child well-being in Ethiopia? POLICY BRIEF monetary child poverty by 21% and the poverty including providing universal public education, gap by 33%. This effect is stronger for girls than changes to benefit levels and distribution of for boys, as well as for children in rural areas the productive safety net program. Across the compared to their urban peers (Fig. 3). These various specifications, the study finds significant findings suggest that overall, the fiscal system decreases in poverty and inequality with various (including in-kind benefits) reduced inequalities distributional effects of such changes by gender in poverty rates among different groups of and location. For example, enrolling universally children. However, this decrease is driven by out-of-school children would decrease the in-kind fiscal transfers – mainly government multidimensional child poverty headcount ratio by spending on education and health. When these 2.2% and the monetary child poverty headcount transfers are excluded, poverty rates increased ratio by 3.2%, with higher effects in urban than for all groups, suggesting that the fiscal system in rural areas. If the amount of PSNP transfers to is not well calibrated for reducing poverty. This existing beneficiaries was doubled, the monetary is a stark reminder that those public services poverty headcount rate would decrease by 1.9% not only play an essential role in delivering on and inequality by 0.9%, with higher effects for fundamental child rights but are also important girls and children in rural areas. Such simulations investments in reducing poverty. are an important toolkit in determining the Finally, the study also estimates the potential potential impacts of fiscal policies and allowing welfare impacts of four fiscal policy simulations policymakers to better understand the impacts that are relevant to children in Ethiopia, of new budget proposals on children. Figure 3 Poverty headcount at different income concepts, by gender and location All Children Girls Boys Rural Urban Market Income 0.33 0.36 0.31 0.39 0.14 Disposable Income 0.34 0.36 0.31 0.39 0.15 Consumable Income 0.36 0.39 0.34 0.42 0.17 Final Income 0.26 0.27 0.24 0.30 0.12 Source: Ambel, Belete, and Fiala (2024). 5 Does fiscal policy have a role in improving child well-being in Ethiopia? POLICY BRIEF KEY MESSAGES Child-focused fiscal incidence analyses, such as inequality, with larger benefits for girls and this one in Ethiopia, provide essential insights children living in rural areas. into the role of different taxes and transfers, as • There are differences in the distributional well as their combined effects, on child poverty. effects of specific taxes and transfers. Direct The study highlights the following key messages. taxes and in-kind transfers, in general, are • The fiscal system, driven by direct taxes and progressive. However, indirect taxes and in-kind transfers, is progressive, poverty- subsidies are regressive. These differences are reducing and equalizing. important in designing fiscal policies aimed at • Government spending on education and improving child well-being. health led to a reduction in poverty and References Ambel, A.A., Belete, G.Y. & Fiala, O. 2024. Lustig, N. 2018. Commitment to Equity Fiscal Policy and Child Poverty in Ethiopia. Child Handbook: Estimating the Impact of Fiscal Policy Indicators Research 17: 221–259. https://doi.org/ on Inequality and Poverty. Edited by Nora Lustig. 10.1007/s12187-023-10088-0. Washington, D.C.: The Brookings Institution. Bornukova, K., Cuesta, J. Shymanovich, G. & Salmeron-Gomez, D.,  Engilbertsdottir, Valetka, U. 2020. Commitment To Equity For S., Cuesta, J. 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