# **1. Introduction**

Because of their idiosyncratic economic characteristics, small island developing states (SIDS) face greater challenges that elevate the costs associated with delivering public services, including education, health, and social programs. The direct impacts of these challenges have repercussions on public finances, pushing governments to assess and prioritize sectors in determining where to focus their investments (OECD 2018). This problem is aggravated by the vulnerability of SIDS to shocks that limit their domestic revenue generation, largely due to their dependence on tourism activities (OECD 2018). In this context, a fiscal incidence analysis becomes of prime importance, as Lustig (2020) points out.

This paper focuses on Grenada, an SIDS with a population of around 113,000, that is highly dependent on tourism. As a result, the country is vulnerable to climatic shocks and economic downturns in developed countries. Grenada is at high risk for climate-related disasters, ranking third globally in terms of GDP vulnerability and seventh in terms of fatalities per 100,000 inhabitants due to weather-related losses. Approximately one-fifth of the country’s population lives below the national poverty line (OECD 2018; World Bank 2021; Grenada, Ministry of Foreign Affairs 2022). The COVID-19 pandemic severely impacted Grenada’s economy, particularly its tourism sector, leading to a significant economic contraction and increased unemployment.<sup>1</sup> The government’s response measures contained the initial spread of the virus, but subsequent waves caused further economic challenges. Despite some recovery in 2021, Grenada’s GDP remains below pre-pandemic levels, and the government had to suspend the fiscal rule for three consecutive years to address the pandemic’s extended impacts.<sup>2</sup> The extended impacts of the pandemic have made additional fiscal stimulus necessary (see Appendix A) to support vulnerable groups and maintain economic activities.

The paper examines the redistributive impact of taxes and public spending, following the Commitment to Equity (CEQ) framework (Lustig 2018). The framework aims to provide a comprehensive picture of the redistributive effects of fiscal policies on household income and consumption. Here the CEQ framework is used to assess Grenada’s fiscal policies, focusing on pre and post fiscal incomes in order to determine the net beneficiaries and payers of these policies (Lustig 2020). For the Grenada context, a fiscal incidence analysis through the CEQ framework is relevant, because it can provide evidence concerning the extent to which the government’s fiscal policies are impacting the welfare of the country’s households and inform future policy decisions.

This paper makes multiple contributions to the existing literature. First, we assess the fiscal system of an SIDS, Grenada, which faces resource constraints, natural hazards, and a high poverty rate. These characteristics make it important to determine whether the country’s fiscal system has a redistributive impact. Furthermore, Grenada is located in a region where fiscal incidence is understudied. Previous work on Caribbean islands using the CEQ methodology has focused on bigger and more developed islands such as Jamaica (Katayama et al. 2021),

> 1 Before the COVID-19 pandemic, Grenada was making a strong commitment to economic reform and resilience building with the support of international organizations. It achieved an average annual growth of 4.5 percent between 2014 and 2019, surpassing the regional average. Fiscal reforms, including the Fiscal Responsible Act (FRA) of 2015, led to a significant reduction in public debt and the accumulation of a fiscal surplus. Nevertheless, Grenada’s economy remains less diversified and highly susceptible to climate change and natural disasters.

> 2 MFMOD Database, the World Bank’s World Development Indicators (WDI), and GEM databases, IMF. Most sources available in https://data.worldbank.org/.

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