other (e.g., inequality reduction but worsening poverty through fiscal policy). Nevertheless, in a context of limited financial resources in these countries, decisions must be made about which sectors are to benefit from greater public expenditure. For example, if many resources are devoted to energy subsidies, there will be fewer resources available for education, health, infrastructure, and other areas of government intervention. Energy subsidies are important for the modern industrial sector, but they benefit mainly nonpoor households. It is therefore important to identify the sectors for which public spending will lead to a significant reduction in poverty and inequality.

State public spending is financed partly from money that the government collects from households and other economic agents in the form of taxes. For households, paying taxes to the state reduces income and purchasing power. It must therefore be ensured that tax collection does not exacerbate inequalities or result in great deterioration in living conditions of vulnerable households.

The main focus of this report is how taxes and budget expenditures in Mali and Niger redistribute resources among the welfare quantiles. The objective is to prompt reflection on potential indicators that might help measure the contribution of fiscal policies to the reduction of poverty and inequality. It presents a fiscal incidence analysis using the Commitment to Equity (CEQ) Institute methodology to assess how taxes and spending distribute resources among the income deciles in Mali and Niger (Appendix A). One of the advantages of the CEQ methodology is that it allows an analysis of the contribution of taxes and public spending to reduction of poverty and inequality. It is possible that taxes are a source of inequality but that the redistributive effect of public spending will be sufficient to more than compensate for the inequalities that the taxation system causes such that, overall, the fiscal system<sup>2</sup> helps reduce inequality.

Our fiscal incidence analysis uses a partial equilibrium approach. It does not model the behavior of agents in response to different government fiscal interventions and does not consider general equilibrium effects. The data used came from the latest Integrated Survey on Agriculture ( _Enquête Agricole de Conjoncture Intégrée_ , EACI) and ( _Enquête nationale sur les Conditions de Vie des Ménages et Agriculture_ (ECVM/A), from 2014/15, and the national budget for 2014. We use simple notions of progressivity and the pro-poor nature of spending and taxes. A public expenditure (or tax) is progressive, in relative terms, if the proportion of expenditure (or tax) in relation to income decreases (increases) with household income. A public expenditure is pro-poor if it is progressive in absolute terms—in other words, if the absolute amount (e.g., per capita) of public expenditures decreases with household income.

The analysis had three broad results.

- (a) In both countries, poverty is high, but the gap between poor and wealthy is small, so rapid improvements could be made. The amount needed (under perfect targeting) to fully

> 2 The fiscal system includes taxes and public expenditures.

3