The Impact of Fiscal Policy on Poverty in Ethiopia: A Computable General Equilibrium Micro Simulation Analysis

Course ID
Ethiopian Economics Association (EEA)
Daniel Abraham Mengistu

In recent periods, Ethiopia has implemented various fiscal policy reforms. Most of these reforms center around indirect taxes and pro-poor expenditure patterns. This study investigates the short-run economy-wide impacts of these fiscal policy changes on poverty. To this effect, the study used a static computable general equilibrium (CGE) model linked to a micro simulation (MS) model. The CGE model used the 2005/06 social accounting matrix (SAM) and the MS model used the 2004/05 Household Income, Consumption and Expenditure (HICE) survey to investigate household poverty via the consumption expenditure changes from the CGE model. The fiscal policies simulated are domestic indirect taxes, government consumption expenditures, and government transfers to households. The findings of the study suggest that the increase in revenue from indirect taxes has worsened the poverty situation of households. The results from the CGE model have all shown decline in real GDP, sectoral output, employment and welfare. In contrast, the study found improvements in the poverty state of households as a result of the introduction of various short-run expenditure measures. However, examination of the net effect revealed worsening poverty at the national level in general and rural households in particular. On the other hand, poverty tended to decline among urban households though negligibly. The major conclusion is that the tax policy has dominant adverse effects on poverty in the short-run. Thus, policy makers need to take into account these adverse effects and come up with short-run pro-poor spending policies that would protect households from the negative strains while the financing policies should continue being implemented.

Corporate Author:Demirew Getachew; Getenet Alemu; Worku Gebeyehu (Editors) andEthiopian Economic Association
Publisher:Ethiopian Economic Association (EEA)
Primary Descriptors:Domestic Indirect Taxes; Government Consumption Expenditure,

Secondary Descriptor:Household Income – consumption – expenditure survey

Geographic Descriptors:Ethiopia
Broad Subject heading:Fiscal policy
Call Number:330.963 PRO 2013
Serial Key Title:Proceeding of the Tenth International Conference on the Ethiopian Economy
Publication catagory: International Conference
Content type: EEA Publication
Publication date: 2013-06-03 00:00:00
Conference Place: EEA Multi-Purpose Building Conference Hall, Addis Ababa
Place of publication: Addis Ababa, Ethiopia
Type of material:Book
Current frequency:Annually
Author: Daniel Abraham Mengistu
Conference date: July 19 – 21, 2012