# **VIII. Conclusions and Policy Insights**

**Distributional analysis provides an important tool for governments, particularly in reform processes** . It can contribute to understanding the household-level impact of fiscal policy, and how it can enhance the equity lens of its policy interventions or mitigate the effect when needed. This type of analysis provides one relevant perspective to fiscal system reforms, which should be accompanied by other considerations such as fiscal impact, and efficiency of revenue collection and spending.

**This paper shows that the fiscal system in Albania plays a positive role in reducing inequality, while it has a slight poverty-increasing effect** . This effect is observed in other countries in the region, although with different magnitudes. Direct and indirect taxes and social contributions have a role in reducing inequality, but they also have a poverty-increasing effect largely driven by the VAT. Direct transfers, with programs such as the Ndihma Ekonomike that are pro-poor and equalizing, partly offset this effect. Beyond providing a static picture of the fiscal system’s impact, the tool allows for policy simulations. For instance, simulations around PIT reforms show that a reduction in the top bracket is expected to reduce the redistributive effect with no impact on poverty. Importantly, it must be noted that the poverty-increasing effect may be tempered by accounting for the positive welfare impact of public education and health services.

**The analysis provides inputs to a policy discussion on several fronts. On the spending side, there is an important policy agenda to improve the coverage and targeting of direct transfers.** Progress is being made in this area. For example, an improved design of the Ndihma Ekonomike, with a proxy means test formula to improve targeting, was piloted in three regions over the past years and is being implemented nationwide. With the poverty-targeting accuracy of Ndihma Ekonomike having improved since the implementation of the pilot and given that it is expected to continue improving as the new eligibility rule of the program reaches other areas of the country, the poverty-reducing effect of this program – already captured as the most progressive transfer in Albania – is likely to be higher, thus mitigating the current net effect of the fiscal system. Similarly, a pilot reform of the disability benefit is ongoing with the objective of revising the eligibility criteria to improve targeting towards the truly disabled and efficiency of the program. An important agenda also remains in terms of improving the efficiency of spending in health and education, for better and more consistent quality of service delivery across regions in Albania.

**On the taxation side, there is an important and ongoing government agenda in Albania around improving tax administration and compliance** . As weaknesses in these systems and processes are addressed to reduce informality in payment of taxes, it is important to understand the potential distributional impact of these measures to, if needed, mitigate it through complementary reforms. Considerations over adjusting the level or design of specific taxes should be accompanied by analysis of fiscal impact and efficiency.

**This analysis has clear implications for a data and knowledge agenda in Albania** . On the data side, improvements can be made for a more systematic and disaggregated collection of quality administrative data at the local and national levels. On the household survey side, similarly, the design of data collection instruments and samples could be revisited to improve the alignment with the social protection system, for a better understanding of the role of the fiscal system for households’ living standards. Finally, a difficult

31