metadata: authors: 0: author: Nguyen,Trang Van
1: author: Žarković,Jelena
2: author: Vladisavljević,Marko
3: author: Ranđelović,Saša
count: Serbia
docna: 0: docna: The Distributional Impact of Serbia’s Taxes
            and Social Spending
docty: Policy Research Working Paper
abstracts: cdata!: In the context of economic recovery and
            structural reforms to boost Serbia’s living standards,
            understanding the impact of fiscal policy on inequality and
            poverty is key to inform policy choices. This paper’s key
            research question is to analyze the redistributive effect of
            fiscal policy on income distribution and poverty in Serbia.
            It advances on the previous literature by comprehensively
            assessing the individual and combined effects of taxes and
            social spending on both inequality and poverty in Serbia,
            using the Commitment to Equity Assessment approach. The
            findings suggest that Serbia’s fiscal system is
            redistributive, reducing the Gini coefficient of income once
            taxes, transfers, and in-kind benefits in education and
            health are taken into account.  However, the
            inequality-reducing impact of the fiscal system in Serbia is
            somewhat smaller than what is observed in other countries in
            Central and Eastern Europe and Latin America, where similar
            analysis has been applied. Moreover, and like in some other
            countries in Europe and Central Asia, the fiscal system
            increases poverty. Direct social transfers in Serbia are
            pro-poor and inequality reducing, but their impacts are not
            large enough to fully offset those of taxation since
            spending on these programs is small. This analysis of fiscal
            incidence in Serbia provides a useful basis for assessing
            the impacts of potential changes in taxes or benefits, which
            can inform options to mitigate short-term adverse impacts
            and build support for reforms.
display_title: The Distributional Impact of
            Serbia’s Taxes and Social Spending
listing_relative_url: /research/2022/06/33853642/distributional-impact-serbia’s-taxes-social-spending
topicv3: Poverty m1326687 695,Fiscal Policy m1327144 445,Income Inequality m1503891 2668
publishtoextweb_dt: 2022-06-27T00:00:00Z
dois: 10.1596/1813-9450-10110
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
author_keys: 0: author_key: 747324
1: author_key: NA
2: author_key: NA
3: author_key: NA
model_extractions: Policy Research Working Paper 10110 The Distributional Impact of Serbia’s Taxes and Social Spending _Trang V. Nguyen Jelena Žarković Marko Vladisavljević Saša Ranđelović_ Europe and Central Asia Region June 2022
Policy Research Working Paper 10110

# **Abstract**

In the context of economic recovery and structural reforms to boost Serbia’s living standards, understanding the impact of fiscal policy on inequality and poverty is key to inform policy choices. This paper’s key research question is to analyze the redistributive effect of fiscal policy on income distribution and poverty in Serbia. It advances on the previous literature by comprehensively assessing the individual and combined effects of taxes and social spending on both inequality and poverty in Serbia, using the Commitment to Equity Assessment approach. The findings suggest that Serbia’s fiscal system is redistributive, reducing the Gini coefficient of income once taxes, transfers, and in-kind benefits in education and health are taken into account.

However, the inequality-reducing impact of the fiscal system in Serbia is somewhat smaller than what is observed in other countries in Central and Eastern Europe and Latin America, where similar analysis has been applied. Moreover, and like in some other countries in Europe and Central Asia, the fiscal system increases poverty. Direct social transfers in Serbia are pro-poor and inequality reducing, but their impacts are not large enough to fully offset those of taxation since spending on these programs is small. This analysis of fiscal incidence in Serbia provides a useful basis for assessing the impacts of potential changes in taxes or benefits, which can inform options to mitigate short-term adverse impacts and build support for reforms.

This paper is a product of the Poverty and Equity Department, Europe and Central Asia Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at tnguyen16@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# The Distributional Impact of Serbia’s Taxes and Social Spending<sup>1</sup>

Trang V. Nguyen, Jelena Žarković, Marko Vladisavljević, and Saša Ranđelović JEL classification: H22, I38, D31 Keywords: fiscal policy, inequality, poverty, taxes, transfers, Serbia

> 1 This paper was written by Trang V. Nguyen (World Bank), Jelena Žarković, Saša Ranđelović, and Marko Vladisavljević (University of Belgrade). We are grateful for advice from Stephen Younger (CEQ Institute) and comments from and discussion with Marijana Jašarević, Lazar Šestović, Alan Fuchs, Gabriela Inchauste, Nora Lustig, and Matt Waipoi.
|Contents|
|---|
|I.<br>Introduction..................................................................................................................................... 3|
|II.<br>The structure of taxes and social spending in Serbia...................................................................... 4|
|III.<br>Data and methodology.............................................................................................................. 10|
|IV.<br>Impact of overall taxes and social spending on inequality and poverty.................................... 14|
|V.<br>Progressivity and marginal effects of individual taxes and transfers............................................ 17|
|VI.<br>Concluding remarks.................................................................................................................. 22|
|References......................................................................................................................................... 23|
|APPENDIX 1.................................................................................................................................... 24|
|APPENDIX 2.................................................................................................................................... 28|
|APPENDIX 3.................................................................................................................................... 32|
|APPENDIX 4.................................................................................................................................... 44|
|APPENDIX 5.................................................................................................................................... 48|

2
# **I. Introduction**

Serbia’s economic reform agenda aims to accelerate economic growth and boost convergence in living standards with the European Union. To support that process, macroeconomic sustainability and fiscal policy for inclusive growth are an important part.<sup>2</sup> Serbia achieved notable fiscal consolidation efforts in 2015-2019 to bring down high public debt and stabilize its macroeconomic foundations, and economic growth and labor market improvements during this period benefitted the population. Yet more structural reforms are needed to boost private sector dynamism and jobs, improve welfare of citizens, and strengthen the middle class in Serbia. In 2019, 23.2 percent of Serbia’s population was still considered at risk of poverty, defined as living below 60 percent of the median per-adult-equivalent income. The COVID-19 pandemic and economic crisis brought earlier progress to a halt and underscored the need for a green, resilient, and inclusive recovery.

In this context, understanding the impact of the fiscal system on inequality and poverty is key to inform policy choices. To better understand how the government redistributes resources and the potential equity and distributional impacts of any future fiscal reform, it is useful to have a comprehensive assessment of the redistributive effect of the current tax-benefit system. The equity impacts should be considered along with other goals of fiscal policy, such as efficiency and sustainability.

This paper’s key research question is to analyze the incidence of fiscal policy in Serbia, that is, the impact of government spending and tax collection on households and on poverty and inequality. The results will shed light on the extent to which the government redistributes resources, which can serve as an input into the public policy debate about whether a tax or a benefit, or what combination, is desirable. To our knowledge, this is the first paper that analyzes and presents a comprehensive assessment of how the distribution of household income is affected by each type of tax or social transfer and by the whole system in Serbia. The paper advances on the previous literature as follows. Earlier work has looked at the impact of direct taxes and direct transfers using SRMOD, a version of the EUROMOD model (Randjelovic and Zarkovic, 2013) and estimated the effects of fiscal instruments on income inequality using a decomposition approach (Krstic and Zarkovic, 2017). However, these studies did not include indirect taxes, which are a major source of revenue collection, and did not look at poverty impacts. This paper incorporates these aspects and, in addition, includes inkind transfers such as education and health, which are major components of social spending, in assessing impacts on inequality.

This paper follows the Commitment to Equity Assessment (CEQ) approach<sup>3</sup> and, to our knowledge, is the first to apply the methodology and generate new findings for Serbia. Compared to other approaches, using the CEQ has the benefits of assessing the comprehensive fiscal system as a whole, assessing impacts for various types of households, and comparison with the many countries where this same approach has been applied. The paper uses the household survey data available at the time of analysis, namely the 2017 Survey of Income and

> 2 World Bank (2020). Serbia Systematic Country Diagnostic Update.

> 3 The Commitment to Equity Assessment (CEQ) toolkit provides a solid methodological framework for answering these questions; see <u>https://commitmentoequity.org/publications-ceq-handbook. This approach has been</u> implemented in many countries across different regions of the world. For methodological details, see Lustig, Nora (editor). 2018. _Commitment to Equity Handbook. A Guide to Estimating the Impact of Fiscal Policy on Inequality and Poverty_ . Brookings Institution Press.

3
Living Conditions (SILC), with 2016 income data, and 2016 budget and administrative data from the Statistical Office of Serbia, Ministry of Finance, Ministry of Education, Science and Technological Development, and Ministry of Health. It examines the following main questions: How much redistribution and poverty reduction are accomplished through social spending, subsidies, and taxation in Serbia? How progressive are revenue collection and government spending? Based on the data available, the analysis covers fiscal components that represent about 65 percent of direct taxes (83 percent of contributions), 50 percent of indirect taxes revenues, and 82 percent of spending. As with many other CEQ studies, certain categories such as corporate tax and spending on infrastructure are excluded due to the difficulty of assigning the benefit or burden to individual households based on the available information.

Our findings show that Serbia’s fiscal system reduces inequality, though it has a povertyincreasing effect. The system is redistributive, reducing the Gini coefficient of income from 0.38 at market income to 0.35 at final income, including the benefit of public expenditures on education and health. However, poverty, measured as per-capita income below $5.5/day in 2011 PPP, is estimated to increase by about 7 percentage points, from 15.3 percent in market income (including pensions as deferred income) to 22.4 percent in consumable income after reflecting direct and indirect taxes and transfers. Serbia’s social benefits are inequalityreducing. Direct taxes in Serbia are overall slightly progressive, and their impact on lowering inequality is smaller than that of direct transfers and the impact observed in other countries. The flat personal income tax gives little progressivity while regressivity of Value-Added Tax (VAT) with respect to current income increases inequality. With respect to consumption when looking at welfare over the life cycle, the incidence of VAT is much less regressive. Future analyses can assess the impacts of potential changes to a tax or a benefit, or a combination of several changes, in the system. Simulating such changes would demonstrate further use of this analysis for policy making.

The paper is organized as follows. The next section describes the system of taxes and social spending. Section III presents the data, assumptions, and methodology in estimating the impact, combining household survey, national accounts, and administrative data. Sections IV and V show the results regarding the impact of the net fiscal system and of each fiscal intervention, respectively. The following section concludes with direction for further use of the analysis.

# II. **The structure of taxes and social spending in Serbia**

## **Fiscal revenue**

The public finance system in Serbia consists of:

- _i)_ central government (Budget of the Republic of Serbia, Social security funds – Pension and Disability Insurance Fund, Health Insurance Fund and National Employment Service, and regulatory bodies);

- _ii)_ local self-governments;

- _iii)_ central-level state owned enterprises (e.g. Electric Power Company, Roads of Serbia, etc.) and local-level state owned enterprises (utility companies).

The structure of tax revenues in Serbia is presented in Table 1, and Appendix 3 includes detailed description of the taxes and spending system.

4
Indirect taxes and social contributions make up the bulk of fiscal revenue. In 2016, indirect taxes made up approximately 49.8 percent of total tax receipts of the general government, direct taxes (personal and corporate income tax) 15.5 percent, while social security contributions 34.7 percent. Two main sources of tax revenues are value added tax (VAT) and social security ~~contributions (SSC), together accoun~~ ting for 64 percent ~~of total tax collections. Our an~~ alysis is ~~focused on the major tax items, including~~ ~~<u>personal income taxes, SSC, VAT, and excise</u>~~ duties.<sup>4</sup> ~~These taxes account for 92 percent of total tax revenues in Serbia in 2016.~~

# **_~~Direct taxes and social security contributions~~_**

Personal income tax (PIT) revenues amounted to 3.8 percent of GDP in 2016. PIT in Serbia applies to wages/salaries, income from self-employment (including entrepreneurs and farmers), and income from authorship and intellectual property rights. The Serbian tax system does not provide for the option of joint, synthetized taxation, which means that all sources of income are assessed separately. Taxation of wages/salaries is the main component of the PIT system, accounting for 73 percent of PIT revenue.

The employment PIT rate in Serbia is flat at 10 percent,<sup>5</sup> and it applies to wage income exceeding a personal allowance of RSD 11,604 per month (approximately 19 percent of average gross wage) in 2016. Income from self-employment is also subject to 10 percent PIT. Income from capital, rental income and capital gains are taxed at 15 percent. Income from authorship and intellectual property rights are taxed at 20 percent. Old-age pensions and social benefits are exempted from taxation. Individuals whose total annual net income from employment, self-employment, authorship and intellectual property rights and other income exceeds a threshold (three times the average annual wage in Serbia) need to pay annual income tax at the rates of 10 percent (on taxable income between three and six times the average annual wage in Serbia) and 15 percent (on income above six times the average annual wage in Serbia).

> 4 Corporate income tax has not been included in the analysis as it is difficult to estimate incidence of tax burden across households. That should not significantly affect the accuracy of our results as corporate income tax revenues account for approximately 4.5 percent of total tax revenues.

> 5 In 2013, the employment income tax rate was reduced from 12 percent to 10 percent, at the same time, the pension insurance contributions rate was increased by 2 percentage points.

5
**Table 1. Serbia general government revenue, 2016**

||Fiscal data|<br>|Included<br>(SILC|in analy<br>and HBS<br>|sis<br> )<br>|
|---|---|---|---|---|---|
||bn RSD|%<br>GDP|Yes/No|bn<br>RSD|%<br>GDP|
|**Total revenue**|1,765.90|42.5||||
|**_Direct taxes_**|235.5|5.7||||
|Personal income tax|155.1|3.8|Yes|101.5|2.5|
|Wages/Salaries|113.0|2.8|Yes|89.7|2.2|
|Self-employment income|6.5|0.2|Yes|9.0|0.19|
|Capital income|11.9|0.3|Yes|0.2|0.0|
|Rental income|3.8|0.1|Yes|2.2|0.1|
|Capital gains|0.7|0.0|No|||
|Other income|13.0|0.3|No|||
|Annual income tax|6.0|0.1|Yes|0.4|0.0|
|Corporate income tax|80.4|1.9|No|||
|**_Social contributions_**|527.5|13.0|Yes|455.1|11.3|
|Pension and disability insurance|354.7|8.8|Yes|313.2|7.7|
|Health insurance|132.7|3.3|Yes|124.1|3.0|
|Unemployment insurance|19.3|0.5|Yes|17.8|0.5|
|**_Indirect taxes_**|755.5|17.7|Yes|363.0|8.9|
|VAT|453.5|11.2|Yes|267.7|6.6|
|Excise taxes|265.6|6.5|Yes|95.3|2.4|
|Other indirect taxes (customs)|36.4|0.9|No|||
|Other revenues|247.4|6.1|No|||

Sources: Authors' calculations based on Ministry of Finance _Note: “Included in analysis” refers to the items that can be identified in the household data for this analysis and the amount that can be estimated and reflected in the analysis._ Social security contributions (SSC) represent a large source of public revenues in Serbia, at 13 percent of GDP (pension contributions – 9.15 percent of GDP, health contributions - 3.4 percent of GDP and unemployment contributions – 0.6 percent of GDP). The social security system in Serbia consists of three components: pension and disability insurance, health insurance, and unemployment insurance. This is a Bismarckian social security system financed 6
from mandatory contributions payable on personal income. In 2016, the contribution rate for pension and disability insurance was 26 percent (14 percent employee and 12 percent employer), health insurance 10.3 percent (5.15 percent employee and 5.15 percent employer), and unemployment insurance contributions 1.5 percent (0.75 percent employee and 0.75 percent employer). All social contributions are paid on employment income and also on part of self-employment income (“entrepreneur’s salary”). Income from authorship and intellectual property rights is subject to pension contributions, while health insurance contributions are paid only if taxpayer is not employed. Health insurance contributions are also paid on pensions (the payment is made by the Pension Fund - see Appendix 3).

# **_Indirect taxes_**

Indirect taxes are the largest source of revenue, of which VAT is the largest single component, amounting to 11.2 percent of GDP (25.6 percent of total tax revenues) in 2016. The standard VAT rate levied on most goods and services in Serbia is 20 percent. The reduced VAT rate of 10 percent is applied to basic food (bread, milk, meat, etc.), water, natural gas, drugs, books, concerts tickets, culture/art magazines, etc. (see Appendix 3).<sup>6</sup> Excise duties generated revenues of 6.5 percent of GDP in 2016. Excise duties are levied on tobacco and tobacco products, coffee, alcoholic drinks, and oil/oil derivatives. Starting from August 2015, excise duties are also charged on electricity.

# **Social spending**

Overall public expenditures in Serbia amounted to 47.3 percent of GDP in 2016. Spending on social transfers (contributory and non-contributory benefits) was 15.2 percent of the GDP, out of which the largest share was for contributory social insurance (12.8 percent of GDP). Spending on education was 3 percent of GDP and health 5.9 percent of GDP (Table 2). Thus, total social spending (social transfers, education, and health) was 24 percent of the GDP. The analysis includes major social spending measures and covers 82 percent of social spending.

The main non-contributory social assistance programs that can be analyzed in the available data include the following. This description pertains to the year of analysis (2016), noting some of the changes introduced in 2018.

1. _Financial social assistance_ represents a means-tested last resort social assistance program for individuals (living alone) or families (including those with children) whose

> 6 The VAT system was introduced in Serbia in 2005, at the standard rate of 18 percent and reduced rate of 8%. However, through the fiscal consolidation in 2013, the standard rate was increased to 20 percent, while the reduced rate being increased in 2014 to 10 percent.

7
- income is below a minimum income threshold. The benefit amount depends on household characteristics and size.

2. _Foster care benefits_ provide cash aid for caregivers (monthly remuneration for their work) and persons placed in foster care (children, elderly). _Caregiver allowance_ refers to monthly payments to individuals who require care and assistance with regards to her/his basic needs, due to the nature and level of injury or illness. Individuals who are insured with the mandatory pension and disability insurance and retirees, who meet conditions for caregiver allowance, receive the allowance from the Republic Pension and Disability Insurance Fund (“the Pension Fund”). All other individuals who meet criteria for receiving caregiver allowance receive that allowance from the Ministry of Labour, Employment, Veteran and Social Affairs.

3. _Family benefit programs_ include child allowance, parental allowance, and wage compensation during maternity leave. There is also a subsidy for pre-school program attendance. Child allowance, as a means-tested program, was previously limited to the first four children in the family, aged 0-19. In 2018, changes to the Law on Financial Support for Families with Children were introduced. Since 2018, it can be granted to four children in total at the time, allowing families with a larger number of children to apply for child allowance for a younger child when the oldest becomes ineligible due to the age limit. A child can receive a benefit after age of 19 years if he/she is under prolonged parental right (until age 26) and participates in further education and training. The child allowance is conditional on school enrollment for those older than the age of 7. Parental allowance refers to a one-off payment to the mother for giving birth to the first child, and payment in 24 equal monthly installments for giving birth to the second, third, and fourth child. With the law changes in 2018, the government increased the allowance amounts and extended the benefit period for the third and fourth child. Now the allowance can be received until child reaches 10 years of age. Finally, changes to the wage compensation during maternity leave increased the length of the employment period prior to the leave that is taken into account for the calculation of the wage compensation. Also, the benefit was extended to the group of mothers in vulnerable employment (working in agriculture, on flexible contracts).

4. _War veterans benefits_ . There are many care benefits for veterans, disabled veterans, and their family members. The major ones are: cash compensations for disabled members of the military, personal compensation for disability acquired at war paid by post offices, personal compensation for disability acquired at war paid through the municipalities, wage subsidies for working veterans, cash payments to military veterans living abroad, annual compensations, and benefits for civilians who have acquired disability at war.

5. _Local government benefits_ . Many local governments provide additional benefits in the form of cash assistance to low-income groups. Some of those benefits are included in the analysis in the form of one-off assistance, heating allowances, utility and education allowance (Table 2).

- In Belgrade, which has the largest social assistance program, most spending goes to one-off cash payments to pensioners with lowest incomes and subsidies for utility bills. Also, there is cash assistance to war veterans and their associations. Cash supplements are provided to parents of newborn children. There are also food packages for the poor, and benefits for students (grants, subsidies for schoolbooks).

8
# **Table 2. General government spending, 2016**

||Administrati|ve data<br>f|Included<br>analys|in the<br>is<br>f|
|---|---|---|---|---|
||mil RSD|% o<br>GDP|mil RSD|% o<br>GDP|
|Total expenditures|1,899,719.70|47.3|||
|**Social spending**|991,743.00|24.7|815,132.00|20.22|
|**Contributory social insurance benefits**|517,018.58|12.8|440,122.90|10.90|
|Pensions|494,209.89||456,101.47||
|Old-age pensions|325,582.75|8.1|304,997.43|7.50|
|Family pensions|82,693.56|2.0|63,679.24|1.58|
|Disability pensions|85,933.57|2.1|67,591.23|1.67|
|Agricultural pensions|||19,166.52|0.46|
|Survivors pensions for children|||667.05|0.016|
|Pension from abroad|||45,774.39|1.13|
|Unemployment benefit|12,545.28|0.3|3,958.44|0.09|
|Sickness leave|10,263.42|0.3|3,544.66|0.08|
|**Non-contributory benefits**|97,076.91|2.3|51,363.20|1.30|
|Financial social assistance|14,276.85|0.3|12,356.35|0.30|
|Foster care benefits|3,408.62|0.1|895.38|0.02|
|Caregivers allowance|9,840.18|0.2|11,679.35|0.28|
|War Veterans benefits|13,557.44|0.3|1,305.09|0.03|
|Parental allowance|7,221.66|0.2|3,025.86|0.12|
|Child allowance|12,446.15|0.3|8,100.46|0.19|
|Wage compensation during the maternity<br>leave|30,435.53|0.7|10,012.08|0.23|
|Heating allowance|||316.15|0.01|
|Utility allowance|||324.35|0.007|
|Education allowance|||2,387.43|0.05|
|One-off assistance|||378.41|0.01|
|Other|5,890.49|0.1|582.30|0.01|
|Compensation for the loss of employment|||4,228.26|0.09|
|Severance payment|||403.79|0.008|
|**Education**|111,138.26|3.0|111,138.26|3.03|
|Pre-school education|2,037.64|0.1|2,037.64|0.05|
|Primary education|69,890.00|1.7|69,880.00|1.74|
|Secondary education|25,636.21|0.6|25,636.21|0.63|
|Tertiary education|25,189.33|0.6|25,189.33|0.61|
|**Health**|212,508.95|5.9|212,508.95|5.90|
|Health Insurance Fund|212,508.95|5.9|212,508.95|5.90|

9
Sources: Authors' calculations based on Ministry of Finance data Regarding in-kind transfers, social spending on health amounted to 5.9 percent of GDP in 2016. Health care in Serbia is provided on a near universal basis through a compulsory health insurance for all employed and self-employed individuals and their families. The state also provides insurance for pensioners, unemployed <mark>and their family members, workers from lossmaking state-owned enterprises,</mark> refugees, and certain vulnerable groups (e.g., single parents). According to data from the Health Insurance Fund, only around 3 percent of the total population is not covered by health insurance. Mandatory health insurance covers the whole basic range of health services. <mark>The central government (Ministry of Health) or local governments (for primary protection) pay for investments in facilities and equipment from general tax revenues. The Health I</mark> nsurance <mark>Fund covers current expenditures (salaries, utility expenses, medical supplies, etc.) and is mainly financed through health contributions.</mark> Spending on education amounts to 3 percent of GDP. Preschool (for 5 to 6-year-olds) and primary school (up to age 15) are mandatory. Most students are in free public schools. The public education system has the largest enrollment with 91 percent of the children enrolled in pre-school programs, 99 percent in primary schools, 98 percent in secondary schools, and 87 percent at higher education institutions. Preschools are financed by the local self-governments, so the parent fee depends on the extent to which daycare is subsidized by the local government. In the capital, Belgrade, 80 percent of the full price is subsidized by the city government that, since 2015, started to subsidize daycare in private pre-school institutions as well.

# III. **Data and methodology**

## **Data sources**

This analysis combines household survey data with data from the national accounts, Ministry of Finance public finance data, and reports of the Statistical Office of the Republic of Serbia. The household surveys used as the basis for the analysis are the Survey on Income and Living Conditions (SILC) for 2017 (which refers to 2016 income) and Household Budget Survey (HBS) for 2016. The SILC is the most comprehensive survey used in the European Union countries to collect microdata <mark>on income, poverty, social exclusion and living conditions.</mark> The SILC has been the basis for officially monitoring household welfare, poverty, and social inclusion in Serbia since 2013. The HBS contains both income and expenditure data, but the level of details on income components and benefits received is less than the SILC, and the sample size is smaller. Therefore, this analysis is primarily based on the SILC while household consumption information in the HBS is used to estimate the impacts of indirect taxes. Appendix 4 explains how value added tax and excises are estimated from the HBS and imputed for each household in the SILC data.

## **Approach**

This paper follows the Commitment to Equity (CEQ) approach developed by Lustig (2018) to analyze the distributional impacts of fiscal interventions. For each household, we define the following income concepts and calculate them for each household in the survey data: 10
- 1) **Market income** includes gross income from labor (wages and income from selfemployment, both from informal<sup>7</sup> and formal employment), capital income, income from private transfers, self-production consumption as well as imputed rent

- a. **Labor income** includes: income from dependent employment, different types of self-employment (entrepreneurship, agriculture, professional practices, household help, selling or reselling products, private services and other business activities)

- b. **Capital income** includes: income from rent, dividends and interest

- c. **Income from private transfers** includes: net (amount received minus amount paid) financial assistance and alimony paid by the household, remittances and private pensions

- d. **Imputed rent** includes estimated value of monthly rent that the house-owners would pay if they had to rent their living space

- e. **Self-produced consumption** is the market value of goods produced for own consumption deducted from expenses incurred in the process of production of goods for own consumption

- f. **Other income** includes reported income for which no source was reported and labor income for children under 16 years of age

- 2) **Market income plus pensions** is calculated based on the Market income (1) from which the total amount of pension contributions is deducted, while pensions (old-age, disability, survivors, agriculture and abroad) are added

- 3) **Net market income** is based on Market income plus pensions (2) from which we deduct direct taxes, health and unemployment insurance contributions

- 4) **Disposable income** is calculated as the sum of the Net market income (3) and direct transfers

- 5) **Consumable income** is calculated as the difference between Disposable income (4) and indirect taxes and indirect subsidies (heating and utility allowance)

- 6) **Final income** is calculated as the sum of Consumable income (5) and in-kind health and education benefits

Comparing the income distribution across these different income concepts helps to evaluate the impacts of the fiscal system and of specific fiscal intervention on inequality and poverty. Market income in this analysis includes imputed rent value for owner-occupied housing to enable cross-country comparison, following the Commitment to Equity method in the Guidebook. The poverty and inequality estimates differ slightly from official estimates based on the SILC, which do not include imputed rent in the income aggregate. Appendix 2 includes a robustness analysis for when imputed rent is excluded, where the direction of the results remains valid even though the levels can differ.

The treatment of pensions and pension contributions is often not straightforward. There is no clear consensus: on the one hand, contributory pensions can be treated as personal savings or deferred income; on the other hand, pensions can be treated as government transfers. Pensions

> 7 Informally employed in this context are workers who do not have a written contract with their employer or workers not paying pension and health insurance contributions.

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<!-- Start of picture text --> Market<br>Income<br>Contributory |<br>Pensions<br>Market<br>Income plus<br>Pensions<br>Direct of. - Direct<br>Transfers J Taxes<br>Disposable<br>Income<br>Indirect os fm Indirect<br>Subsidies ' Taxes<br>Consumable<br>Income<br>In-Kind Transfers im Copayments,<br>(Education, Health) j User Fees<br><!-- End of picture text -->
measure of welfare, as used by Serbia’s official poverty and inequality indicators. Appendix 1 explores an alternative question about the incidence of indirect taxes over the life cycle with respect to household consumption as a proxy for permanent income, using adjustments by the income-consumption ratio. The estimated value of indirect taxes that can be included in the analysis reflects the extent of information available in the HBS. In most countries, total consumption of households in the household surveys (HBS) represents a fraction of household consumption reported in the National Accounts. In this application of the methodology to Serbia, the fraction of indirect taxes that can be captured in the analysis (Table 1) closely reflects the fraction of consumption that is captured in the HBS (close to 60 percent, see also Appendix 4). Due to the lack of an available input-output table in Serbia, this analysis has not been able to estimate indirect effects of indirect taxes.

On the spending side, the SILC includes detailed information on who received payments from contributory and non-contributory social protection programs. Among contributory benefits, the data includes all types of pensions (old-age, disability, survivor’s, agricultural, pension from abroad, pensions from private schemes), unemployment benefit, and sickness benefit. The non-contributory benefits included in the survey are financial social assistance, child allowance, parental allowance, foster care benefits, war veteran benefits, severance payments, one-off assistance paid by local governments, heating and utility bills allowance. Wage compensation during maternity leave is not defined as such in the data, but we use the question “Did you receive any pregnancy-puerperal benefits” for this purpose. Caregiver allowance is placed in one variable, so it is not possible to distinguish what is contributory and received through the Pension Fund and what is noncontributory and received from the Ministry of Labour, Employment, Veteran and Social Affairs. We used the reported values from the SILC database for all the benefits.<sup>9</sup> Assigning the value of public spending on education follows the government cost approach. Since the education system is mostly public, we calculate per beneficiary input costs by level of education as total government spending divided by the number of pupils in each level of education. This per pupil expenditure is then assigned as education benefit to each student. We use the number of students from the SILC data for tertiary education since it includes post graduate students. For the other levels of education, the number of students from the SILC is almost equal to the numbers from administrative data. For health expenditures, since access to services is near universal, we follow the cost of insurance approach and assign per capita expenditures (obtained by dividing total expenditure by the total population in Serbia) for each person in the dataset.<sup>10</sup>

> 9 For the financial social assistance, reported values are used, complemented by imputed values for some households. Validation results indicate that the number of individuals that report receiving the financial social assistance in the SILC data roughly corresponds to the number of beneficiaries in the administrative data. However, total expenditures in the survey are underestimated by about 50 percent. After careful investigation of the reported amounts, this underestimation seems to be largely due to reporting the monthly, instead of yearly as asked, amounts in the SILC data set. For those that report amounts close to the monthly benefit levels (about 35 percent of the total population that report the receipt of the benefit), we impute administrative benefit amounts. After this correction, the total value of financial social assistance from the SILC equals 86 percent of its value in administrative data.

> 10 The values for education and health benefits are scaled so that the ratio of benefit to income is the same in the administrative data (budget divided by household income) and survey data (benefit divided by market income) (following the CEQ Handbook).

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# **IV. Impact of overall taxes and social spending on inequality and poverty**

## **Impacts on inequality**

Government intervention through taxes, social benefits, and in-kind transfers reduces inequality by almost 10 percent, or 0.03 Gini points. Without fiscal intervention, the Gini coefficient of market income inequality (when pensions are treated as deferred income) in Serbia stands at 0.385. After government intervention in the form of direct and indirect taxes, social contributions, social benefits and in-kind transfers (healthcare and education), inequality falls to 0.351 (Figure 2). The largest contribution to the reduction of inequality comes from in-kind transfers (in health and education), which is reflected in the fall of the Gini from 0.385 for consumable income to 0.351 for final income. The effects of direct taxes (personal income tax and social security contributions) and social transfers (contributory and non-contributory benefits) are slightly smaller, bringing the Gini down from 0.385 for market income to 0.361 for disposable income. Indirect taxes (VAT and excise duties) tend to increase inequality with respect to current income, which is reflected in the increase of the Gini from disposable to consumable income `.` Over the life cycle, the incidence of indirect taxes with respect to household consumption as a proxy for permanent income is much less regressive, as discussed in Appendix 1.

**Figure 2. Serbia: Change in inequality (Gini coefficient) from market to final income**

<!-- Start of picture text --> 0.60<br>Old-age pensions as<br>0.55 transfers<br>Old-age pensions as<br>0.482<br>0.50 deferred income<br>0.45<br>0.385<br>0.40<br>0.361<br>0.351<br>0.385<br>0.35<br>0.30<br>0.25<br>Market Income Disposable Income Consumable Final Income<br>Income<br><!-- End of picture text --> Source: Own estimations using HBS and SILC data Note: The poverty and inequality estimates differ slightly from official estimates based on the SILC because imputed rent is included in the income aggregate, and the direction of the results is robust to whether imputed rent is included.

The reduction of inequality in Serbia due to fiscal intervention is smaller than that in several countries in Central and Eastern Europe, some neighboring countries, and Latin American countries of similar income level where the CEQ analyses have been conducted. When 14
pensions are treated as deferred income, the scale of inequality-reducing redistribution through the tax and transfer system in Serbia of 0.034 Gini points is lower than in Albania (0.052), Montenegro (0.072), Romania (0.071), and Croatia (0.102).<sup>11</sup> It is also lower than in Armenia, Poland, Belarus, the Russian Federation, Ukraine, and several Latin American countries with similar income level as Serbia. Strict comparability across countries can be difficult due to the use of income versus consumption as the main welfare aggregate to represent disposable income.

As previously mentioned, the main analysis in Serbia treats pensions as deferred income since Serbia has a pay-as-you-go pension system and the entitlement to pensions is linked to payment of contributions during employment. Figure 2 also shows the impact on inequality when pensions are treated as government transfers instead of deferred income. In that scenario, market income inequality in Serbia amounts to 0.482, which is somewhat lower than in Albania (0.49), Croatia (0.51), and Montenegro (0.53). The overall reduction in inequality due to fiscal intervention in Serbia is equivalent to 0.131 Gini points from market income to final income when old-age pensions are treated as transfers but again lower than in most of the countries in Figure 3 (0.24 in Poland, 0.22 in Croatia, 0.17 in Romania, 0.15 in Albania).

**Figure 3. Decline in inequality (Gini coefficient) from market to final income**

<!-- Start of picture text --> 0<br>-0.05<br>-0.1<br>-0.15<br>-0.2<br>-0.25<br>-0.3<br>Pensions as deffered income Pensions as transfers<br><!-- End of picture text --> <mark>Source: CEQ Standard Indicators. https://commitmentoequity.org/datacenter/</mark><sup>11</sup> 11 Commitment to Equity Institute Data Center on Fiscal Redistribution, 2019. Based on information from: ALBANIA (Davalos et al., 2018); ARGENTINA (Rossignolo, 2018); ARMENIA (Younger et al., 2019); BELARUS (Bornukova et all., 2017); BOLIVIA (Paz Arauco et al., 2014); BRAZIL (Higgins, Pereira and Cabrera, 2014); BURKINA FASO (World Bank, 2018); CHILE (Martinez-Aguilar et al., 2018); COLOMBIA (Melendez and Martinez, 2019); COLOMBIA (Melendez and Martinez, 2019); COMOROS (World Bank, 2017); COSTA RICA (Sauma and Trejos, 2014); CROATIA (Inchauste and Rubil, 2017); DOMINICAN REPUBLIC (Aristy-Escuder et al., 2019); ECUADOR (Llerena et al., 2015); EGYPT (Lara Ibarra et. Al., 2019); EL SALVADOR (Beneke, Lustig, and Oliva, 2018); ETHIOPIA (Hill et al., 2017); GEORGIA (Cancho and Bondarenko, 2017); GHANA (Younger et al., 2018); GUATEMALA (Icefi, 2017a); GUINEA (World Bank, 2019); HONDURAS (Icefi, 2017b); INDONESIA (Jellema, Wai-Poi, and Afkar, 2017); IRAN (Enami, Lustig, and Taqdiri, 2017); JORDAN (Alam, Inchauste, and Serajuddin, 2017); KENYA (Pape and Lange, 15
<mark>Direct taxes and social benefits in Serbia are less equalizing than in a few Central and Eastern Europe (CEE) countries where similar analysis has been conducted. Based on the CEQ analysis for other countries</mark><sup>12</sup> <mark>, and disaggregating effects by policy instruments, the equalizing effects of direct taxes and social benefits in Serbia are somewhat stronger than in non-European developing countries, but still considerably smaller than in those CEE economies.</mark> The marginal contribution of all direct transfers in Serbia is to reduce the Gini (when pensions are treated as deferred income) by 0.0139. In Russia, Romania, and Croatia, they reduce inequality by 0.0220.024 points. Direct transfers in Armenia and Albania also have a higher capacity to reduce inequality, with the marginal contribution of 0.019 and 0.17, respectively. <mark>At the same time, the impact of indirect taxes in Serbia on inequality is close to the average of the CEE countries and non-EU developing countries with available CEQ results.</mark> <mark>The equalizing effects of in-kind transfers in Serbia is comparable with the effects in those CEE countries. The effects of health and education spending in Serbia are considerably stronger than in non-European developing countries which may be the result of its free and universal primary and secondary schooling and almost universal healthcare scheme.</mark>

# **Impacts on poverty**

Government intervention through taxes and benefits is associated with an increase in poverty in Serbia, mostly due to indirect taxes. Using household income and standardized international poverty lines of $1.9, $3.2, and $5.5/day (2011 PPP), the results suggest that the poverty rate decreases after direct taxes and social benefits are taken into account but increases upon the imposition of indirect taxes. In other words, social transfers cannot fully offset the burden of taxes on poverty. Table 3 shows that the share of the population whose consumable income is below a poverty line is higher than that for market income, except for the extreme poverty line of $1.9/day. The same trend applies if poverty is anchored on the national relative poverty line at 60 percent of median equivalized income.

Similarly, poverty gap and poverty severity are reduced when direct taxes and social benefits are introduced, but the effects are reversed after considering indirect taxes. This finding is robust across different absolute poverty lines and the relative poverty line. Since households do not observe the monetary value of health and education transfers, these items are not included in the computation of the poverty headcount, following standard practice.

> 2018); MALI (Hounsa, Coulibaly and Sanoh, 2019); MEXICO (Scott, 2014); MEXICO (Scott et al., 2018); MEXICO (Scott et al., 2018); MONGOLIA (Freije and Yang, 2018); NAMIBIA (World Bank, 2017); NICARAGUA (Icefi, 2017c); NIGER (Hounsa, Coulibaly and Sanoh, 2019);  PANAMA (Martinez-Aguilar, 2018); PARAGUAY (Gimenez et al., 2017); PERU (Jaramillo, 2014); PERU (Jaramillo, 2019); POLAND (Goraus and Inchauste, 2016); ROMANIA (Inchauste, et al, 2016); RUSSIA (Popova, 2019); SOUTH AFRICA (Inchauste et al., 2017); SRI LANKA (Arunatilake, 2019); TANZANIA (Younger, Myamba, and Mdadila, 2019); TUNISIA (Jouini et al., 2018); UGANDA (Jellema et al., 2018); UKRAINE (Bornukova et al., 2019); URUGUAY (Bucheli, 2019) and VENEZUELA (Molina, 2016).

> 12 - <u>http://commitmentoequity.org/publications crosscountrystudies/</u>

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**Table 3. Serbia: Changes in poverty rates due to government intervention**

|||**Market**<br>**Income**<br>**+**<br>**Pensions**|**Disposable**<br>**Income**|**Consumable**<br>**Income**|
|---|---|---|---|---|
|Poverty|||||
|Headcount|$1.9 PPP|5.1%|2.8%|4.9%|
||$3.2 PPP|8.0%|5.9%|10.3%|
||$5.5 PPP|15.3%|14.4%|22.4%|
||60% of median equivalized disposable||||
||income|22.9%|22.8%|34.4%|
|Poverty Gap|$1.9 PPP|2.7%|1.4%|2.4%|
||$3.2 PPP|4.2%|2.6%|4.5%|
||$5.5 PPP|7.3%|5.7%|9.4%|
||60% of median equivalized disposable||||
||income|10.2%|8.8%|14.0%|
|Poverty severity|$1.9 PPP|1.9%|1.0%|1.7%|
||$3.2 PPP|3.0%|1.7%|2.8%|
||$5.5 PPP|4.9%|3.3%|5.6%|
||60% of median equivalized disposable||||
||income|6.5%|4.9%|8.1%|

Source: Own estimations using HBS and SILC data <mark>The finding that fiscal policy is estimated to increase poverty in Serbia is similar to that in most available analyses in Europe and Central Asia. Only in some countries in the CEQ sample, such as Russia and several countries in Latin America, poverty is reduced or remains mostly unchanged after accounting for direct and indirect taxes and transfers.</mark><sup>13</sup> <mark>Poverty, measured as per-capita income below $5.5/day in 2011 PPP, is estimated to increase by about 7 percentage points in Serbia, from 15.3 percent in market income (including pensions as deferred income) to 22.4 percent in consumable income. In Armenia, poverty increases by 6.6 percentage points while in Romania 1.5. Other studies using slightly different international poverty lines also indicate poverty increases after fiscal interventions in Albania, Montenegro, Croatia, and Poland.</mark>

# **V. Progressivity and marginal effects of individual taxes and transfers**

This section discusses how each component of the tax and benefit system contributes to the system’s overall impacts on poverty and income inequality. The influence of individual fiscal interventions may be different from the influence of the overall fiscal system. Both the size and progressivity of a tax or expenditure item determine its marginal effects on inequality and poverty measures. For example, a highly progressive but small government transfer may have a small marginal effect on inequality and, therefore, small redistributive impacts. We first show how taxes and transfers affect household income across the distribution to illustrate their distributional impact. We then analyze the marginal effect of each individual tax and benefit component on the Gini coefficient and the poverty headcount.

> 13 Based on the data from the CEQ data center: https://commitmentoequity.org/datacenter/.

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<!-- Start of picture text --> _~ 140% 140%<br>2 120% 120%<br>100% 100%<br>= 80% 80%<br>=, 60% 60%<br>EI 40% 40%<br>3 20% 20%<br>0% ee x<br>"B -20% -20%<br>is -40% -40%<br>g -60% -60%<br>a Poorest 2 3 4 5 6 7 8 9 Richest<br>Deciles of market income (plus pensions)<br>Direct transfers mums Direct taxes mam Non-pension contributions<br>mam Indirect subsidies mmm Indirect taxes mem Health<br>mann Education =—®—Net cash position Total<br><!-- End of picture text -->
- **Kakwani index:** A Kakwani index for taxes will be positive (negative) if a tax is globally progressive (regressive). A Kakwani index for transfers is positive if a transfer is progressive in relative terms. For taxes, the index is defined as the difference between the concentration coefficient of the tax and the Gini for pre-fiscal (market) income. For social transfers, it is defined as the difference between the Gini for market income and the concentration coefficient of the transfer.

- **Marginal contribution** : The marginal contributions of each tax and transfer component to reducing the Gini and the poverty headcount, respectively, show the redistributive effect and poverty-reducing effect. It is calculated as the difference between the Gini coefficient or the poverty rate with and without particular tax or transfer. In case of a positive value, there is a redistributive effect of a tax or a transfer and a decline in the Gini coefficient. A positive marginal contribution to poverty reduction captures a poverty-reducing effect. It is useful to calculate the marginal contribution since a progressive tax is not necessarily equalizing, depending on certain characteristics of the fiscal system, and the marginal contribution can show impacts on reducing poverty.

**<u>Table 4. Serbia: Marginal Contributions to Reducing Inequality in 2016</u>**

||Relative<br>Size with<br>respect to<br>Market<br>Income +<br>Pensions|Concentration<br>Coefficient|Kakwani<br>Index|Marginal<br>Contribution<br>to<br>Redistributive<br>Effect|Marginal<br>Contribution<br>to Poverty<br>Reduction|
|---|---|---|---|---|---|
|**Disposable income**|91.7%|||||
|**All contributory pensions**|23.08%|0.3432|0.0417|0.0792|0.1540|
|Sick leave|0.16%|0.0327|0.3522|0.0002|0.0004|
|Unemployment benefit|0.18%|-0.1185|0.5034|0.0006|0.0006|
|Parental allowance|0.14%|-0.2095|0.5944|0.0008|0.0004|
|Child allowance|0.37%|-0.6047|0.9896|0.0036|0.0058|
|Financial social assistance|0.57%|-0.7479|1.1328|0.0059|0.0070|
|Other social assistance|0.03%|-0.1675|0.5524|0.0001|0.0003|
|War veterans benefit|0.06%|-0.3191|0.7040|0.0002|0.0003|
|Care allowances|0.54%|-0.0003|0.3852|0.0014|0.0028|
|Wage compensation during the maternity leave|0.46%|0.0059|0.3790|0.0011|0.0014|
|Foster care for children|0.04%|-0.4141|0.7990|0.0003|0.0004|
|Education related benefits<sup>14</sup>|0.11%|0.0000|0.3849|0.0002|0.0007|
|**All direct transfers excl contributory pensions**|2.93%|-0.2441|0.6290|0.0139|0.0216|
|**All direct transfers incl contributory pensions**|26.01%|0.2771|0.1078|||
|Capital tax (per capita) - dividend|0.00%|0.4916|0.1067|0.0000|0.0000|
|Capital tax (per capita) - interest|-0.01%|0.6110|0.2260|0.0000|0.0000|
|Capital tax (per capita) - rent|-0.10%|0.5278|0.1429|0.0001|-0.0001|
|Personal income taxes|-4.55%|0.4916|0.1067|0.0047|-0.0038|
|Contributions - Pensions|-14.47%|0.4580|0.0731|0.0073|-0.0228|
|Contributions - Health insurance|-5.73%|0.4580|0.0731|0.0038|-0.0050|
|Contributions - Unemployment insurance|-0.83%|0.4608|0.0759|0.0006|-0.0006|
|**All direct taxes**|-4.68%|0.4948|0.1098|0.0050|-0.0039|

14 This education-related benefit under direct transfers is separate from the in-kind education benefit.

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|**All contributions**|-21.04%|0.4581|0.0732|0.0070|-0.0410|
|---|---|---|---|---|---|
|**All direct taxes and contributions**|-25.72%|0.4648|0.0799|0.0071|-0.0591|
|**Consumable income**|75.1%|||||
|All indirect subsidies|0.03%|0.1238|0.2611|0.0001|0.0000|
|Total VAT|-12.30%|0.2650|-0.1199|-0.0171|-0.0459|
|Total Excises|-4.38%|0.2143|-0.1706|-0.0078|-0.0134|
|All indirect taxes|-16.68%|0.2517|-0.1332|-0.0272|-0.0685|
|All taxes|-21.36%|0.3049|-0.0800|-0.0228|-0.0782|
|Alltaxes and contributions|-42.40%|0.3809|-0.0040|-0.0344|-0.2100|
|**Final income**|81.6%|||||
|In-kind health benefits|4.24%|0.0000|0.3849|0.0157||
|In-kind educationbenefits: preschool|0.04%|-0.0991|0.4840|0.0002||
|In-kind education benefits: primary level|1.22%|-0.2043|0.5892|0.0068||
|In-kind educationbenefits: secondarylevel|0.51%|-0.1533|0.5382|0.0026||
|In-kind education benefits: tertiary level|0.50%|0.1275|0.2574|0.0012||
|Alleducationtransfers|2.27%|-0.1175|0.5024|0.0108||
|All in-kind transfers|6.51%|-0.0410|0.4259|0.0257||

# **Direct and indirect taxes**

Table 4 shows that direct taxes and social contributions in Serbia have a small contribution to reducing inequality. They are slightly progressive, as shown by the positive Kakwani coefficient. They are also inequality-reducing. However, the marginal contributions of direct taxes to redistributive effect of 0.005 is smaller than that observed in other countries, for example, 0.007 in Albania (2015) and 0.03 in Croatia (2014).<sup>15</sup> The flat personal income tax with a tax allowance gives little progressivity. Since taxes and contributions take away from market income, they are poverty increasing, as shown by the negative marginal contribution to poverty reduction (poverty is measured using the US$5.5/day in 2011 PPP poverty line).

On the other hand, with respect to current income, indirect taxes are regressive (negative Kakwani index). They contribute to an increase in both poverty and inequality. Both VAT and excise taxes are regressive. Excises have a smaller negative impact on poverty and inequality than VAT since they are smaller in size. Appendix 1 analyzes the incidence of indirect taxes with respect to consumption, i.e., looking at welfare over the life cycle. Indirect taxes taken together in Serbia are relatively unequalizing with their marginal contribution to reducing inequality of -0.027 Gini points. While the effect is smaller than that for Croatia, it is more unequalizing than many Latin American and developing countries.<sup>16</sup>

# **Social spending**

All contributory and non-contributory benefits are progressive. They contribute to reducing both poverty and inequality, as shown in the positive marginal contributions of these items (Table 4, which shows the results for the main social benefits as captured in the data). Among

> 15 Inchauste and Rubil (2017). “The Distributional Impact of Taxes and Social Spending in Croatia”. World Bank Policy Research Paper #8203.

> 16 Inchauste and Rubil (2017). “The Distributional Impact of Taxes and Social Spending in Croatia”. World Bank Policy Research Paper #8203.

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social benefits, child allowance and financial social assistance have the biggest inequalityreducing and poverty-reducing effects. These programs are well targeted to the poor. Almost 93 percent of the financial social assistance and 90 percent of the child allowance is concentrated at the bottom 40 percent of the distribution of market income (including pensions as deferred income). Half of all the spending on parental allowance goes to bottom 40 percent of the population in terms of market income (Figure 5).<sup>17</sup> However, the marginal effects of social benefits on poverty and inequality-reducing are constrained by the relatively small coverage of the most targeted transfers. The marginal contributions of all direct transfers (excluding contributory pensions) are to reduce the Gini by 0.0139 points and the poverty headcount by 0.0216.

It should be noted that the different benefit programs may have different intentions. Not all programs necessarily have a redistributive or poverty-reducing objective, for example, sick leave and wage compensation during maternity leave. Almost 40 percent of the wage compensation during maternity leave goes to top 40 percent of the market income distribution.

**Figure 5. Concentration of social benefits (by market income plus pensions quintiles)**

|0%|20%<br>40%|60%|80%<br>100%|
|---|---|---|---|
|Birth grant<br>Child allowance<br>Monetary social assistance|||Poorest<br>2|
|Sick leave|||3|
|Unemployment benefit<br>Care allowances|||4<br>Richest|
|Wage compensation pregnancy/maternity leave||||
|All direct transfers||||

Source: Own estimations using HBS and SILC data Education and health in-kind benefits have inequality-reducing effects. As noted earlier, we assume that the benefit received by the individual is equal to the amount spent per capita. Figure 6 shows that overall education spending is progressive, with primary education being the most redistributive (Table 4). The concentration coefficient for all levels of education except tertiary is negative, suggesting that a larger share of expenditures goes to the lower deciles. However, these results do not capture heterogeneity in the quality of services. For example, the PISA 2018 results<sup>18</sup> suggest that in reading, socio-economically advantaged students outperformed those from more disadvantaged background by 73 score points. Though this is still smaller than the average difference between the two groups across OECD countries (89 score points), the performance gap in Serbia had increased since 2009 when it was 66 points (87 points on average across OECD countries). Health spending is equally distributed across the income quintiles, given the way health benefits are assigned, but is progressive in relative terms since it makes up a larger share of income at the bottom of the distribution.

> 17 This result is based on quintiles of <mark>market income plus pensions per capita that excludes pregnancy and maternity allowance, which may differ from other studies looking at targeting based on quintiles of disposable income.</mark>

> 18 <u>https://www.oecd.org/pisa/publications/PISA2018_CN_SRB.pdf</u>

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<!-- Start of picture text --> 0% 20% 40% 60% 80% 100%<br>Education: preschool PY<br>Education: primary level YY<br>Education: secondary level 7<br>Education: tertiary level Po<br>Net education transfers fr<br>Net health transfers Po<br>MPoorest @2 O3 4 ORichest<br><!-- End of picture text -->
# **References**

Commitment to Equity Institute (2019). Data Center on Fiscal Redistribution, country studies. https://commitmentoequity.org/ Inchauste, G. and Rubil, I. (2017). “The Distributional Impact of Taxes and Social Spending in Croatia”. World Bank Policy Research Paper #8203.

Krstić, G., <mark>Žarković Rakić</mark> , J. (2017). Please, mind the gap: income inequality in Serbia. In: Stojković, D., Božović, M. and Ranđelović, S. (ed.), _Economic Policy for Smart, Inclusive and Sustainable Growth_ , 15-17 Jun 2017, Belgrade, p. 213-227 Lustig, Nora (editor). 2018. _Commitment to Equity Handbook. A Guide to Estimating the Impact of Fiscal Policy on Inequality and Poverty_ . Brookings Institution Press.

Randjelovic, S and Zarkovic, J. (2013) "Improving Working Incentives: Evaluation of Tax Policy Reform Using SRMOD". _International Journal of Microsimulation,_ Vol. 6, Issue 1, <mark>157-176</mark> World Bank (2020). Serbia Systematic Country Diagnostic Update.

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