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Fiscal policy worsening poverty in a number of countries, World Bank book concludes

In a number of nations, the poorest pay more in taxes than they receive in cash transfers, according to a new World Bank book.

Poverty in Ghana was found to be worsened after taxation and direct transfersThe Distributional Impact of Taxes and Transfers: Evidence from Eight Developing Countries, published in collaboration with Tulane University’s Commitment to Equity Institute (CEQi), provides an assessment of the effects of taxation and public expenditures on the income of different households, individuals, and socioeconomic groups. It analyses the revenue and spending of governments of a number of low- and middle-income countries.

It concludes that while the impact of direct taxes and direct transfers is always equalising, in a number of cases they increase poverty. This is because 'the poor' in five countries assessed - Bolivia, Ethiopia, Ghana, Guatemala and Sri Lanka - are net payers into the fiscal system due to high consumption taxes on basic goods. Direct taxes have more of an impact in reducing inequality than direct transfers, it concludes. Direct transfers have the highest equalising force in Armenia, Georgia and South Africa. 

Of all the countries looked at, spending on direct transfers was most important (6.1% of GDP) in Georgia, which recently converted its social insurance system to a noncontributory pension system. Research has shown that most of Georgia’s poverty reduction in 2010–12 was attributable to the expansion of social assistance, with the labour market playing a limited role.

The book was launched at an event yesterday with co-authors Gabriela Inchauste, a lead economist in the Poverty and Equity Global Practice of the World Bank Group and Nora Lustig, Director of CEQi.