# **IV. Applying the Method to Albania: Data and Empirical Strategy**

## **_Household Survey Data_**

The analysis uses data from the 2015 Household Budget Survey (HBS) for Albania, which provides information on the socio-economic situation of the Albanian households. The HBS is a continuous survey of private households covering the entire territory of Albania, representative at the urban and rural level, and at the prefecture level. It collects data both from a 14-day diary and a direct interview. In 2015, it interviewed 7,335 households. The 2015 HBS 2015 combined with macroeconomic and fiscal data from national income accounts for 2015. The section below on assumptions details the shortcomings of the HBS data for this analysis, and how these were addressed.

Although the HBS reports income data, its overall quality, particularly for labor income, is low. Disposable income seems to be largely underreported in the HBS, as shown by a consumption aggregate<sup>14</sup> that is 2.5 times higher than the reported disposable income. Labor income is collected at a household level and not at an individual level, and estimates of labor income per employed for households with employees in the formal-sector employees are much smaller than estimates from administrative data.<sup>15</sup> These estimates suggest a large underreporting of labor income, likely linked to the high informality rates and a large agricultural sector in Albania. Given this, the analysis follows recommendations (Lustig 2017) of using consumption instead of income as a basic measure for incidence analysis when income data are unreliable. In this case, the starting point is to set disposable “income” equal to the household consumption identified in the survey. From there, the method goes backwards to estimate market income (removing direct transfers, and adding direct taxes and contributions), and forward (removing indirect taxes and adding in-kind transfers) to estimate consumable and final income, respectively.

The analysis is complemented by data from national accounts, administrative information for certain programs and design features of each specific intervention.

## **_Fiscal Interventions Included_**

**On the revenue side, the analysis includes the personal income tax (PIT), social security contributions, VAT and excises** . These account for 78 percent of the total tax revenue and 70 percent of the total fiscal revenue. Therefore, the analysis does not include other taxes that affect households, such as custom tax and property taxes (at 0.4 and 0.3 percent of GDP respectively). Although it does not directly include taxes paid by firms (profit tax or VAT by firms), it is assumed that, in equilibrium, firms pass the VAT tax burden to consumers (full pass-through).

**On the spending side, the analysis includes social protection spending, as well as health and education spending** . These account for 45 percent of the total spending and 62 percent of the total classified spending

> 14 This consumption aggregate includes new durables only, excludes imputed rent (only paid rent is included) and represents about 56% of private consumption in the national accounts).

> 15 Our survey-based estimate of household labor income per employed worker for these type households is approximately 35,000 ALL/month (450 US$/month in 2005 PPP) while in administrative data the average wage is 46,829 ALL/month (603 US$/month in 2005 PPP) based on the enterprises’ payrolls declared to the General Directorate of Taxation (Source: INSTAT).

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