unrefined fuel). Additionally, the government plans to withdraw from importing finished products, enabling the oil marketing companies to assume importing them. The Farmer Input Subsidy Program (FISP) will begin scaling down its coverage (from the current 1.6 million to 1.0 million farmers) through a “graduation” program.

This study assesses the redistributive impact of fiscal policy, and its individual elements, in Zambia. The study uses an internationally recognized methodology developed by the Commitment to Equity (CEQ) Institute. The study estimates the impact of fiscal revenue collections (taxes) and fiscal expenditures–– direct cash and near-cash transfers, in-kind benefits, subsidies––on household-level income inequality and poverty. It then provides evidence to help policy makers and other Zambian stakeholders understand the trade-offs inherent between government’s current fiscal policy priorities (such as energy policy) and other social goals (such as poverty reduction). Having an evidence-based understanding of fiscal policy in Zambia is crucial for two reasons: (1) to inform the government’s ongoing efforts to tackle poverty and (2) to enable an informed debate among policy makers and with the public while reassessing the scope and design of existing fiscal instruments to reduce poverty going forward.

The impact of the fiscal system on poverty and inequality in Zambia is described via an estimation of “prefiscal” and “post-fiscal” income measures (Box 1). The pre-fiscal measure comprises market income before any transfers (including public spending on health and education, farming inputs, fuel and energy subsidies and unconditional cash transfers) or taxes (including personal income taxes, VAT, alcohol and tobacco excises) of any kind have been added. “Post-fiscal” income<sup>5</sup> takes pre-fiscal income and adds to it a subset of fiscal policies executed: subsidies and direct transfers received, direct and indirect taxes paid, and inkind transfers received through use of services. Poverty and inequality measures then are derived under pre- and post-fiscal income measures and compared. The primary micro-data source used for this study is the 2015 Zambian Living Conditions Monitoring Survey assisted by other sources of secondary data including administrative records.

Zambian fiscal policy, and many of its elements taken individually, reduces income inequality. The largest reduction in inequality is created by in-kind public service expenditures on education, and the overall decrease in inequality is more pronounced in rural areas. However, the poverty headcount ratio rises when fiscal policy is executed _._ Indirect taxes––most notably, VAT––increase the poverty headcount ratio, and the direct transfers and subsidies received by poor and vulnerable households are too small to counteract this impact.<sup>6</sup> The study’s results broadly confirm other recent work on the incidence of fiscal policy. Cuesta et al. (2012) find that neither in-kind education nor health spending nor agricultural input subsidy spending are strongly pro-poor. The current team also finds, as do Dabalen et al. (2015), that the equitable distribution of health care or education services is driven primarily by demographics and scale effects. In other words, poor households have more children (on average), creating higher demand for health and education services in

> 5 Post-fiscal income concepts include Net Market Income, Disposable Income, Consumable Income, and Final Income; see Figure 5 and accompanying text below.

> 6 The apparent contradiction – that one set of fiscal policies can be responsible for a reduction in inequality and an increase in poverty – can be explained intuitively. The total net gain (or the amount received in benefits minus the amount paid in taxes) is smaller for richer households, when measured as a percent of their pre-fiscal income, than the total net gain for poorer households measured as a percent of their pre-fiscal income. Therefore, the post-fiscal income distribution is compressed relative to the prefiscal income distribution and inequality falls.  But the net gain from fiscal policy may still be negative or close to zero for all households.  In that case everyone or nearly everyone, including the poor, vulnerable, and the middle class, are measured with lower levels of post-fiscal income than pre-fiscal income, and poverty rises.  This pattern describes the actual distribution of net fiscal policy gains and losses in Zambia in 2015.

4