# **1. Introduction**

Belarus is often positioned as a country that has a “socially oriented economy,” as stated by the authorities. This statement is supported by low income inequality (one of the lowest in the region) and low incidence of poverty (the poverty headcount based on the international poverty line of USD 4 PPP is effectively zero). Different studies (e.g. Chubrik, 2007; Chubrik and Shymanovich, 2016) reveal the pro-poor nature of Belarusian economic growth, but there is no clear evidence whether low inequality and poverty have resulted from tax and subsidies systems design or are due to other factors.

This paper seeks to fill this knowledge gap by analyzing the impact of fiscal policy on poverty and inequality in Belarus. Methodologically, the analysis follows the _Commitment to Equity_ (CEQ) analysis, which has already been applied in more than 30 low- and middle-income countries (Lustig, 2016). This fiscal incidence analysis reveals who are the beneficiaries of public social expenditures and the contributors to the public finances, who bear the major tax burden.

The assessment of the impact of fiscal policies is timely for Belarus. Currently, the country is struggling with a prolonged recession and has to optimize its budget expenses. So far, the reform debate has been centered around the pension reform (Lisenkova and Bornukova, 2017, Shymanovich, 2016), and the elimination of utility subsidies (IMF, 2016; Chubrik, Shymanovich, 2016; Zhang and Hankinson, 2015). This paper seeks to inform the current debate with information on the poverty and inequality impacts of social programs and their cost efficiency. To the best of our knowledge, this is the first attempt at a comprehensive fiscal incidence analysis for Belarus.

The fiscal incidence approach captures only the effects of government policies in the form of taxes, subsidies and benefits collected from and provided to households. However, part of the social support is provided implicitly through the subsidization of state-owned enterprises (SOEs). It is partially reflected in budget expenditures (in 2015, 4.3% of GDP was spent on subsidies to the SOEs), and partially comes through quasi-fiscal operations not captured by fiscal data. On the one hand, this support helps SOEs to preserve excessive employment, on the other – it leads to inefficient resource allocation, thus reducing overall welfare. Thus, in addition to the general problems with imputation of the effects of SOEs subsidization at the household level, there is an open issue of the overall “sign” of its impact on poverty and inequality: it could be that lower subsidies to SOEs would result in faster job creation in the private sector and better job opportunities for the poor. That is why in this study we do not consider the social roles of SOEs, focusing only on the taxes paid by households and subsidies provided to them directly from the budget. Other limitations of the CEQ approach are that it does not evaluate the quality of government services, does not take into account the behavioral/rational responses to changes in the fiscal policy, and assumes an equal distribution of income and consumption within the household.

Our results suggest that fiscal policy in Belarus is very effective in lowering both poverty and inequality. Direct transfers (including pensions) and direct taxes lower the national poverty measure by 17 percentage points. They also decrease the Gini index from 0.407 to 0.267. The impressive magnitude of positive fiscal effects puts Belarus among the equalization leaders in the group of developing countries. Most of the effect could be attributed to pensions. When we adopt the pensions-as-deferred-income (PDI) approach, the poverty reduction amounts only to 2.5 percentage points, and the Gini coefficient decreases only by 0.02.

The results also point in the direction of possible reforms. As the government seeks to minimize expenditure, it is important to focus on the most efficient interventions. Indirect subsidies are highly cost-inefficient. A 1% of GDP spent on the utility subsidies delivers 3 times less poverty and inequality reduction compared to the same 1% spent on pensions. Indirect utility subsidies and transport tariffs are not targeted, available to everybody and regressive. Replacing indirect subsidies with well-targeted benefits programs would allow reducing poverty and inequality more efficiently. Unemployment benefits (currently at very low levels) are the most cost-efficient benefit program, suggesting that the plans to increase benefits will have significant impacts in reducing poverty and inequality.

The paper proceeds as follows. We describe the welfare state in Belarus in Section 2, also discussing the role of quasi-fiscal policies for social welfare. Section 3 describes the CEQ methodology and peculiarities of its application to the Belarusian data. In Section 4 we present and discuss the results of the CEQ assessment and the fiscal impact on poverty and inequality in Belarus. Section 5 concludes.

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