percent in 2016, consistent with the notable increase in the age profile of the population pyramid. With high levels of emigration of working age population being an important contributing factor, since independence the average age in Moldova has been increasing more rapidly than in the ECA region overall (Cojocaru and Matytsin, 2018).

The income decompositions described above provide some insight into the contribution of certain parts of the fiscal system (notably, transfers) to inclusive growth. However, it is worth considering more rigorously, to what degree various components of the fiscal system, both taxes and transfers, alleviate poverty and inequality in Moldova. The answer to this question is important both in the context of creating fiscal space for growth enhancing spending while protecting poor and vulnerable groups, and also to be able to assess the distributional impact of the important policy changes such as the tax policy changes that were introduced in 2018. An investigation of this broad question – what is the distributional incidence of each element of the fiscal system, and of the system overall, and how effective (and efficient) each element of the fiscal system is in alleviating poverty and inequality – is the objective of this paper.

In order to answer this question, the paper employs the Commitment to Equity (CEQ) framework – a fiscal incidence analysis that focuses on the poverty and inequality implications of the country’s fiscal system (Lustig and Higgins, 2013). The methodology, described in detail in section 3 of this paper, relies on assigning to each household in a representative household survey sample, various taxes and social transfers (both direct and indirect), based on a set of income concepts that allow for a gradual incorporation of different components of the fiscal system into the household’s income. This setup then allows us to compute a set of poverty and inequality indices before and after the program intervention, which gives the marginal effect of a given program on poverty and inequality. In addition to the poverty and inequality effects, the CEQ setup also enables us to compare across programs their efficiency in reducing poverty and inequality, that is the effect of the program, normalized by the overall budget that the program commands, to account for the fact that the differential impact of different programs on poverty or inequality is a function of, for instance, program targeting, but also of the overall budget that the program wields.

One clear advantage of the CEQ methodology is also the harmonized methodology that has been applied in over 70 countries worldwide, including a number of ECA countries such as Belarus, Poland, Romania, the Russian Federation, and Ukraine. The methodological consistency in the way income concepts are defined, as well as reliance on internationally comparable poverty thresholds in US$ Purchasing Power Parity (PPP) equivalents allows for relatively straightforward cross-country comparisons and benchmarking of the distributional impacts of various taxes and transfers, and comparisons of program efficiency.

It should be noted at the outset that the CEQ focuses on the poverty and inequality impact of the tax-benefit system, whereas other aspects of fiscal policy are not discussed in detail in the analysis, such as fiscal sustainability or revenue generation. The omission of these issues from the analysis does not deny their importance for overall fiscal equity. However, the primary focus of the CEQ framework is to provide insights on fiscal incidence and impact of taxes and transfers on poverty and inequality. Nevertheless, in section 4 we present a discussion of efficiency of various instruments, that is, their impact of poverty and inequality per dollar allocated to the program, which does provide insights on ways in which the poverty and inequality impact of the fiscal system could potentially be improved, holding the overall envelope constant, or how much money could be saved, for a given poverty or inequality impact, by focusing reforms on parts of the fiscal system that are particularly inefficient in achieving fiscal equity goals, and/or strengthening programs that have a high degree of efficiency.

The main findings emerging from the analysis suggest that the tax-benefit system in Moldova is quite pro-poor, with 60 percent of the population as net recipients, and households at the bottom of the income distribution receiving as much as 96 percent of their final income as net benefits (including old age pensions). The overall distributive effect of the tax-benefit system is significant; the Gini index falls from 0.48 for market income to 0.31 for final income, a 36 percent reduction. Similarly, the poverty rate falls by some 20 to 60 percent from the level associated with market income, depending on the poverty threshold used, with the poverty alleviating effect being stronger the closer one gets to the bottom of the income distribution. The overall redistributive effect of various programs depends in part on its targeting and ability to cover households in need, but it also depends on the program budget – larger programs have greater capacity to alleviate poverty and inequality, at least in principle. Comparing the efficiency of various programs in alleviating poverty and inequality per dollar allocated to these programs, we can see that the targeted social assistance to poor families’ benefits is the most efficient. Of all the types of direct transfers, poverty benefits have the lowest cost of fighting poverty and inequality, even though the overall poverty reduction effect of the program is muted by its small size. Old age pensions, despite not being 5