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. However, most of the effect is attributed to the pension system. If we treat pensions as a deferred market income rather than government transfer, direct taxes and transfers result in a minor Gini index reduction of 0.025 pp. Indirect taxes and subsidies do not contribute to inequality reduction. Furthermore, fiscal interventions may be a cause of poverty, as 1.9% of population becomes poor due to direct taxes and transfers. The fiscal impoverishment headcount goes up to 3.3% when we account for indirect taxes and subsidies as well. Vulnerable groups like large and lone parent households, people living in rural areas and those not being fully employed have an especially high risk of becoming poor due to fiscal interventions. These groups are in general benefitting from social policy, but high impoverishment rates suggest that related social security measures need improvement and better targeting.

Direct transfers, in particular pensions, are the most equalizing and pro-poor of the fiscal interventions. Pensions, for example, are often assigned to households with zero market income, effectively pulling them out of poverty. Taxes in Belarus are not equalizing. Direct taxes are neutral in their influence over inequality. Indirect taxes are regressive. Indirect transfers and taxes increase poverty by 1.8 percentage points, mostly due to the regressive nature of the indirect taxes and poor targeting of subsidies.

Our results also point towards possible reforms. Unemployment benefits (currently at very low level) are the most cost-efficient benefits program, suggesting that the plans to increase benefits will have a significant impact on reducing poverty and inequality. Pensions and child-care benefits are also cost-efficient.

Indirect subsidies are highly cost-inefficient: 1% of GDP spent on utility subsidies delivers 3 times less reduction in poverty and inequality compared to the same 1% spent on pensions. The indirect subsidies to utility and transport tariffs are not targeted, but they are available to everybody and regressive. They are also offering lessthan-average support to vulnerable groups. Replacing indirect subsidies with a well-targeted benefits program will reduce poverty and inequality more efficiently. Restricting access to benefits (like student grants and childcare benefits) and subsidies for households at the top of the income distribution also might be a possibility worth exploring: even the most conservative estimate suggests possible savings of 1% of GDP from the better targeting of transfers and subsidies.

# **References**

- Chubrik, A. (2007). _GDP Growth and Income Dynamics: Who Reaps the Benefits of Economic Growth in Belarus?_ In Haiduk, K., Pelipas, I., Chubrik, A. (Eds.) _Growth for All? Economy of Belarus: The Challenges Ahead_ ; IPM research Center.

- Chubrik, A. (2016a). Uslovija obuslovlennogo finansirovanija: MVF vs. EFSR [Conditions of Conditional financing: the IMF vs. the EFSD], IPM Research Center, _Commentary_ DP/16/05.

- Chubrik, A. (2016b). Effects of Economic Downturn on Regional Development in Belarus, World Bank background paper, _mimeo_ .

- Chubrik, A., Shymanovich, G. (2016). Impact assessment of the social economic policy changes on the status of the socially vulnerable groups in Belarus, UNDP report, _mimeo_ .

- Chubrik, A., Shymanovich, G. (2016). Increasing utility tariffs: social aspects, IPM Research Center, _Commentary_ 16/01 (in Russian)

- Favaro, E., Smits, K., Bakanova, M. (2012). Structural challenges for SOEs in Belarus: A case study of the machine building sector, _World Bank Policy Research working paper_ WPS 6010, Washington D.C.

- Higgins, S. (2017). Producing Indicators and Results, and Completing Sections D and E of CEQ Master Workbook using the CEQ Stata Package. Chapter 7 Lustig, N. (Ed.) _Commitment to Equity Handbook. A Guide to Estimating the Impact of Fiscal Policy on Inequality and Poverty_ , Tulane University and the World Bank, Fall 2016.

- Higgins, S., Lustig, N. (2016). Allocating Taxes and Transfers and Constructing Income Concepts. Chapter 5 in Lustig, N. (Ed.) _Commitment to Equity Handbook. A Guide to Estimating the Impact of Fiscal Policy on Inequality and Poverty_ , Tulane University and the World Bank, Fall 2016.

IMF (2016). Staff Report For The 2016 Article IV Consultation, IMF _Country Report_ 16/298.

Kakwani, N. (1984). On the measurement of tax progressivity and redistributive effect of taxes with applications to horizontal and vertical equity, _Advances in Econometrics_ , 3, 149-168.

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