that VE is partially compensated by RE; indeed, horizontal inequity in the form of RE is relatively low. Therefore, most of the redistributive effect of fiscal interventions occurs through a compression of the income distribution (VE).

**Table 4.** Redistributive effect. Uruguay, 2017

||From Pre-Fiscal<br>to Disposable<br>Income|From Disposable<br>to Adjusted<br>Income|From Pre-Fiscal to<br>Adjusted Income|
|---|---|---|---|
|Redistributive effect|0,0326|0,0456|0,0782|
|Vertical equity (VE)|0,0357|0,0469|0,0817|
|Reranking effect (RE)|0,0030|0,0013|0,0035|
|Horizontal inequality (RE/VE)|0,0840|0,0277|0,0428|

Source: Authors’ estimates based on ECH (2017), INE and Fiscal Accounts and CEQ Methodology Notes: Redistributive effect is the change in the Gini coefficient of moving across CEQ income concepts.

In **Table 3** we also report the effect of fiscal interventions on poverty using as threshold the official poverty line as defined by INE.<sup>20</sup> Poverty increases slightly when moving from Pre-fiscal to Net Market Income (as a result of direct taxes and contributions to the health system). But poverty decreases from Pre-fiscal to Disposable Income, that is, after payment of direct taxes and contributions to health system and reception of direct taxes. To isolate the effect of direct transfers we can focus on the passage from Net Market Income to Disposable income: the poverty rate decreases around 3 percentage points.

We calculate four complementary indicators that measure the efficacy and efficiency of _direct transfers_ in reducing poverty ( **Table 5** ). First, the vertical expenditure efficiency measures the percentage of transfers that go to the poor: the index is 46.5 percent when using the official poverty line. Secondly, the spillover index measures how much of the transfers received by the poor population are above the strictly necessary to cover their basic needs (i.e. bringing them out of poverty). If we use the threshold set by the official line, the spillover effect is 21.3 percent. Finally, we report the poverty reduction efficiency and the poverty gap reduction efficiency. The 20 Welfare and poverty analysis in Uruguay, as in most countries in Latin America, uses an income-based welfare aggregate. Official estimations of poverty are carried out by the National Institute of Statistics ( _Instituto Nacional de Estadística_ – INE) and updated annually with the information captured in the Continuous Household Survey ( _Encuesta Continua de Hogares_ ). A household is considered poor if the sum of a series of income sources of all its members do not allow them to purchase a basket of basic goods and services (i.e. food and non-food items) that are deemed to be a minimum required to enjoy a decent living. The average official poverty line is roughly equivalent to US$ 10.67 (2011 PPP) per person per day and higher than the US$5.5 typically used by the World Bank for upper-middle income economies. The official poverty rate for 2017 was 7.9 percent. There are major conceptual differences between the methodology used by INE to calculate the official households’ welfare measure (i.e. total household income) to measure poverty and the CEQ income concepts that will lead to differences in the estimated poverty rate. The CEQ analysis presented here is not intended to replicate the official poverty measurement methodology, but to show how government interventions affect the purchasing power of households.

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