children in urban areas compared to the second quintile. Secondary education spending does not benefit the poorest children in rural areas (representing only 0.1% of market income) and is relatively constant across the other quintiles at around 2% of market income. In contrast, in urban areas, transfers on secondary education represent 5.2% of market income for the poorest quintile and 4.3% in the richest quintile, but this is most pronounced for children in the middle quintile (7.8% of market income). These progressivity and pro-poorness results are also confirmed by Kakwani indices and concentration coefficients (see Tables B1 and B2 in Annex B).

# **4.2.  The effect of the fiscal system on poverty and inequality**

A thorough understanding of how fiscal policies affect poverty and inequality requires an analysis of the distributional effects of the full fiscal system, i.e., combining revenue-raising activities with public spending and transfers. In line with the CEQ methodology, this can be achieved by determining poverty and inequality at different income categories (Lustig 2018) and following individuals through the various steps of the fiscal system (see also Figure 1). While this provides crucial insights into the distinct role of different fiscal policies to reduce monetary poverty, this approach unfortunately does not allow for a similar analysis of multidimensional poverty. Table 6 and Table 7 show key statistics on monetary poverty and inequality for all four income concepts.

First, market income (pre-fiscal income) includes private market or non-market earnings, e.g., what families earn through employment (before tax), any pensions, or other income they may receive (remittances, interests on savings etc.). At this stage, we find 33% of children live in monetary poverty, with poverty rates a little higher for girls than boys (36% versus 31%). Children in rural areas are significantly more likely to be poor than those in urban areas, with poverty headcounts of 39% and 14%, respectively. Monetary inequality (as measured by the Theil index) is 0.32 for all children. Inequality is higher for girls and children in urban locations.

Second, disposable income is derived by adding direct transfers (PSNP and non-PSNP) and subtracting direct taxes (e.g., income tax, agriculture income tax and land use fee, property tax) from market income. Poverty headcounts remain broadly constant to those at market income, increasing by one percentage point for all children and those living in urban areas. This is partly due to the lack of progressivity in direct transfers: while direct taxes are progressive overall (i.e., the tax burden increases as households are getting richer), direct transfers are lowest for the poorest 20% of children and highest in the middle quintile. Monetary inequality decreases slightly between market and disposable income.

Third, consumable income adds indirect subsidies (kerosene and wheat subsidies) to disposable income and subtracts indirect taxes (VAT and excise). With indirect taxes significantly higher than direct taxes (although broadly progressive), and indirect subsidies being both small as well as benefiting mostly richer households, the fiscal system up to this point leads to an increase in poverty 18