40 Fiscal Policy Approaches for Recover Forward
Fiscal Policy Approaches / Fiscal Incidence Analysis and Microsimulations for Better Policy Decisions
Fiscal Incidence Analysis and Microsimulations for Better Policy Decisions



Fiscal Policies


Guidelines and Diagnostics


The COVID-19 pandemic and its aftermath and other crises such as the war in the Ukraine have brought fiscal policy’s potential to mitigate the immediate effects of shocks into sharp relief. Given the global need to close fiscal gaps as well as make ongoing public investments in the recovery from COVID-19 and mitigating the economic consequences of the current war in the Ukraine, understanding how this can be achieved in a manner that does not burden poor and vulnerable households – who were in many cases disproportionately affected – is even more important.


Fiscal incidence analysis (FIA) estimates the impact that fiscal policy has on individual and household incomes and on inequality, poverty rates, and social welfare more generally. The Commitment to Equity approach to FIA maps both the burden of taxes paid (income taxes, property taxes, and indirect taxes like VAT, excise taxes, and sales taxes, and customs duties) as well as the benefits received from public expenditures (on health and education, water, sanitation, and hygiene services, housing services, social assistance and social protection, and indirect subsidies) to households using microdata available from budget, income and expenditure, or living conditions surveys. Key results show the aggregate net impact of both taxes and transfers on each household and the net effect on poverty or inequality. FIA can feed into microsimulation tools to predict the impact of new policies or reforms in current policies and contributes to making the fiscal policy design process more progressive.


Tracking Global Progress


The newly adopted SDG Indicator 10.4.2, "The Redistributive Impact of Fiscal Policy" which measures the extent to which inequality is reduced in a country due to the fiscal system, is based on FIA and complements the 2030 Agenda progress tracking with regard to inequality. Initial data points have been uploaded in early 2021, and many more countries are expected to provide information on the indicator.


Supporting Global Knowledge and Capacity


Equity analysis of fiscal policy’s current and potential impacts allows governments to go beyond targets broad objectives and provide context and forward-looking momentum for policy reform. In order for analysis to lead to policy reform, however, increased facility with the construction of FIA indicators needs to be developed among policymakers, technocratic personnel (for example in National Statistics Offices), development stakeholders, and among civil society organizations and advocacy groups. Capacity development approaches should be flexible and effective for each of those key stakeholder groups and be available when there is sufficient time for individuals to absorb key principles and country-specific results. A set of self-directed and always-accessible learning modules describing FIA and other policy analysis tools, as well as the interpretation of results and indicators produced, are available here.


Identifying Data Gaps to Align Donor Support


Calculating the SDG indicator 10.4.2, undertaking FIA using the CEQ methodology, and estimating the impact of future fiscal policies using microsimulations require accessible and reliable household survey data and budgetary and administrative data from the government. For the realisation of the 2030 Agenda, availability of data after 2015 is especially important. The map below indicates data availability as of October 2021 and shows where more support of FIA is needed.


Disseminating Best Practices 


Even the best analytical results do not always lead to policy actions, unless there are coordinated efforts to bring them into policy debates and discussions. The Best Practice note is a summary of the lessons learned from stakeholders around the world in bringing good analytics into policy debates. The note focuses on the most important factors behind success stories, identifies who were the likely partners and champions in advancing the agenda with the government and discusses strategies for using the evidence to make fiscal policies more equitable.