# **B. Impact of Fiscal Policy on Inequality and Poverty**

As shown in Table 3, income inequality measured by the Gini index declines across the different income concepts considered. It goes from 0.461 to 0.445 when moving from Pre-Fiscal Income to Net Market Income, that is, after the intervention of direct taxes and contributions to health system. The decline is similar after direct transfers (going from Net Market Income to Disposable Income), as it goes from 0.445 to 0.429. Finally, the highest reduction of the Gini coefficient is due to in-kind transfers: the Gini coefficient of the Adjusted Income is 0.383, equivalent to 0.046 percentage points lower than Disposable income. The total reduction in the Gini coefficient amounts to 0.078 percentage points when comparing Adjusted income to income before fiscal interventions.<sup>19</sup> The redistributive effect of fiscal interventions may be measured as the change in the Gini coefficient. In turn, this change can be decomposed in the reranking effect (RE) and the vertical equity (VE) measure. The latter is concerned with the principle that people with different income should be treated differently. Therefore, under vertical equity, fiscal interventions would lead to income units (households) to be closer than before the interventions. Nevertheless, these interventions might also lead to changes in positions (for example, A is richer than B before fiscal policy instruments are put in place, but B is richer than A after they are). These changes are called reranking effect.

**Table 3.** Evolution of inequality and poverty through different income concepts. Uruguay, 2017

||Gini I|ndex|Headcount p<br>Officialpov|overty<br>ertyline|
|---|---|---|---|---|
||Index|Diff.|Index.|Diff.|
|Pre-fiscal income|0,461||0,173||
|Net market income|0,445|-0,017<sup>***</sup>|0,190|0,018<sup>***</sup>|
|Disposable income|0,429|-0,016<sup>***</sup>|0,158|-0,032<sup>***</sup>|
|Adjusted income|0,383|-0,046<sup>***</sup>|||

Source: Authors’ estimates based on ECH (2017), INE and Fiscal Accounts and CEQ Methodology. Notes: *** p<0.01, ** p<0.05, * p<0.1 for a test of means testing the null hypothesis that the difference between the income concept of the row and the income concept of the row above is zero.

We perform this decomposition and report the results in **Table 4** . The vertical equity measure indicates the change in the Gini coefficient when keeping individuals in the same order, that is, in the absence of reranking. Since reranking means a loss of horizontal equity, the reported measure of reranking effect (RE/VE) has traditionally been called horizontal inequality. The results show 19 Given the unavailability of indirect taxes information for this exercise, it is not straightforward to compare the effects on the Gini index found here (a drop of 0.078) with the results obtained in other countries. Studies that incorporate both direct and indirect taxes, where the latter are typically regressive, will appear to be less inequality reducing than studies that incorporate direct taxes only. With this in mind, it is worth noting that the estimated change in Gini found here is close to that found in other countries in the region: - .0813 in Mexico using data for 2010 ( Scott 2013), -.074 for Chile in 2013 (Martinez-Aguilar and Ortiz-Juarez 2016), -.0739 in Ecuador 2011-12 (Llerena Pinto et al. 2017); and -.0677 in Colombia with data from 2010 (Melendez and Martinez 2015).

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