three mechanisms: i) Decreasing the income threshold would curtail beneficiary numbers, ii) reallocating funds from reduced expenditure could finance larger benefit amounts, and iii) mirroring the tax deduction approach, larger benefits would be directed toward households with many children, who are shown to be highly vulnerable in this analysis. However, a balance must be reached when adjusting the maximum qualifying income for beneficiaries; if set too low, specific economically vulnerable households might not receive benefits and could experience increased vulnerability after accounting for the negative impacts of indirect taxes. Therefore, the envisioned scenario finds a middle ground, reconciling the intervention's fiscal impact limitations and its potential for reducing child poverty. Finally, a substantial increase in the generosity of child benefits is expected to yield significant welfare increases among eligible families with children.

# VI.Summary and Policy Recommendations

**Child poverty is a pressing social issue in Bulgaria, standing among the EU's highest rates, with significant implications for several long-term development outcomes.** The country exhibits a strikingly high (albeit diminishing) occurrence of child poverty within the European Union. Yet, while fiscal incidence analysis is a frequently employed approach, it often overlooks the perspective of children or gender, owing to the intricate methodological challenges involved in reconciling individual and household-level concepts. It is critical to understand the role of fiscal policy in reducing overall poverty and child poverty in particular, and the efficacy of family-oriented interventions in reducing child poverty.

**This paper revisits the previous fiscal incidence analysis of Bulgaria. It formulates a specialized fiscal incidence analysis focusing on children to measure the current effects of public expenditure and taxation on overall poverty and child poverty.** The World Bank conducted a comprehensive fiscal incidence analysis (CEQ) for 2018 to comprehensively assess the distributional implications of fiscal policies and programs. This analysis is now revisited and updated to offer a dynamic perspective on the impact of fiscal policies on poverty and inequality, considering the effects of the COVID-19 pandemic. The study extends its scope by introducing an evaluation of how fiscal policies influence child poverty, employing microsimulation techniques to gauge the potential welfare effects of policies geared toward families with children. This work builds upon prior research by Vaughn and Cabrera (2020) but emphasizes a more detailed exploration of benefits for families and children.

**Our main results show that, despite the obstacles posed by the COVID-19 crisis, Bulgaria's fiscal system displayed restrained effectiveness in reducing the at-risk-of-poverty rate.** Consistent with the precovid19 findings, the fiscal system tends to increase poverty when measured using the EU's at-risk-of-poverty (AROP) line due to the limited redistributive capacity of direct taxes and transfers. Nonetheless, the system is not unequivocally poverty-increasing, demonstrating a capacity to reduce poverty when considering lower poverty lines, especially for lower-income deciles.

**Bulgaria's fiscal system contributes to inequality reduction, with significant contributions from direct transfers, education, and health-related transfers; however, the redistributive impact of direct taxes and transfers remains comparatively low within the European context.** This evidence underscores the importance of social protection transfers to reduce poverty and inequality. While individual components may have modest individual impacts, their combined effect is substantial. Our results show that most elements within Bulgaria's fiscal system are progressive, with the poorest being net recipients of social

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