which the CEQ approach estimates to be largely progressive. Despite the decrease in inequality, the degree of redistribution is small by international comparison. At the same time, the analysis estimates that poorer households pay more in indirect taxes than they receive in cash benefits in the short-term. The fiscal system increases the short-term measure of the poverty headcount by 2.1 percentage points. Although direct transfers to poor households have a poverty-reducing effect, they are not large enough to offset the poverty-increasing effect of indirect taxes—notably of value-added tax that is levied on consumption. While poorer households are worse off on average in cash terms in the short-term, it is important to note the analysis does not account for the longer-term economic benefits of health and education services to households which will help reduce poverty. Subject to available funding, cash transfers at a scale large enough to compensate for the burden of taxes has the potential to deliver net benefits to poor and vulnerable households, while improved targeting would help to reduce the overall costs of such expanded program.

Cambodia is not alone among developing countries in seeing short-term poverty increase due to the modeled elements of fiscal policy. Because the CEQ methodology has been consistently applied in over 60 countries, the exercise allows Cambodia’s performance to be compared with peer lower-middleincome countries. Several lower-middle-income countries experience net poverty increases due to their fiscal policies which is not surprising given the frequent heavy reliance on indirect taxation. Nonetheless, some low and lower-middle income countries have more poverty-reducing effects of fiscal policy.

It is important to note that the presented Cambodia fiscal assessment predates the COVID-19 pandemic. Hence, the results may be different at present due to the scale up of cash transfers to poor and vulnerable households in response to the pandemic. As of January 2023, the COVID-19 cash transfer program has disbursed US$ 932 million since the launch in June 2020. The program has been the largest component of the government’s support package. Spending on cash transfers rose from less than 0.1 percent of GDP in 2019 to 0.7 in 2020 and 1.4 in 2021. The program has reached about 690,000 households and 2.7 million individuals, or about 17 percent of the population, up from 2 percent pre-pandemic.<sup>8</sup> Box A.1 in the Appendix summarizes the government’s fiscal response to the crisis.

The next sections are organized as follows: Section 2 provides an overview of the main taxes and transfers in Cambodia, including the size and composition of these fiscal tools. Section 3 describes the methodology, empirical approach, and data sources. Section 4 presents the main findings for Cambodia and in comparison with other countries. Section 5 describes the results from the simulations that examine the poverty and inequality effect of expanding cash transfers to poor households. Section 6 concludes and highlights the implications of the results for Cambodia.

# **2. Taxes and Social Spending in Cambodia**

## **Evolution of government revenues and spending between 2009 and 2019**

In the decade leading up to 2019, Cambodia experienced strong economic growth that raised the incomes of the poor and reduced poverty. This took place under a period of macroeconomic stability and prudent

> 8 See World Bank (2022a) for summary of the government’s fiscal response to the crisis.

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