Benefit Incidence Analysis

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Benefit Incidence Analysis

• Prepared for African Development Bank Training
  Course on the Economics of Poverty

Hammamet, Tunisia, May 23-25, 2005
Jonathan Haughton Suffolk University,
Boston jonathan.haughton_at_suffolk.edu
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Goals Objectives

1. Determine how to answer the question Who
   benefits from government spending?
2. Outline
3. Context role of government
4. The three practical steps in benefit incidence
5. Example education in Peru
6. Income or expenditure distribution?
7. Presenting the results
8. Example education in Cote dIvoire
9. Example social and health spending in Peru
10. Net effects of the tax/transfer system
11. Case Health in Ghana
12. Tax incidence the example of Lebanon
13. Six issues
14. Average vs. marginal incidence
15. Incorporating behavior
16. Valuing benefiits
17. Partial or total analysis
18. What counterfactual?
19. Deep causes

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Context Role of government

• Three main roles for government
• Efficiency/Correct market failure
• Monopoly
• Public goods (e.g. defense, basic research)
• Externalities (e.g. air pollution)
• Referee
• Macroeconomic stabilization
• Equity
• Benefit Incidence Analysis focuses on equity only

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Basic Concept

• Figure out how much each person gains from
  government spending
• and provide a breakdown by the income or
  expenditure distribution
• Easier for some items (education, health,
  transfers) than others (roads, police, army,
  diplomatic service, public pensions)
• Applicable for ½ of government spending

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Step 1 of 3

• Step 1 Estimate unit subsidies
• Base on actual, not budget, spending
• May need survey (e.g. Ghana, health, 1995)
• Be skeptical (e.g. Uganda school subsidies)
• Factor in capital spending, admin. costs
• Focus on subsidy, so net out user charges
• Pay attention to data quality
• Cost/child for schooling depends on of
  children survey and official counts may differ.

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Step 2 of 3

• Identify users (coverage)
• Requires household survey data
• NB Survey data also needs information on
  spending and/or income, to allow for
  distributional analysis
• Problem of rare events (e.g. go to university
  hospitalized)
• Poor recall may understate usage
• E.g. Survey-based hospitalization rates in Ghana
  were 12 of actual rates.

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Step 3 of 3

• Aggregate users into groups
• Typically quintiles (5) or deciles (10)
• Sort by expenditure per capita or income per
  capita
• or by poor/non-poor
• Less common requires a poverty line.
• Quantiles should be based on individuals, not
  households

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Example Peru, education

• 15.5 of government spending
• Unit subsidies
• Pre-kindergarten S/. 583 per child per year
• Kindergarten and primary S/. 386 per pupil
  per year
• Secondary S/. 624 per pupil per year
• Tertiary S/. 2,506 per student per year.
• From central government budget (actuals) divided
  by official enrolment numbers.
• NB S/. 3.261 per USD, April 2005
• NB No adjustment for private schooling no
  disaggregation of costs by region no information
  on value of capital services
• Enrollment by level from ENNIV-2000
• Expenditure, income from ENNIV-2000

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Income or Expenditure?

• Income overstates regressivity
• Some have low income, but transitory
• Expenditure permanent income
• But may understate regressivity
• At heart of debate in Latin America

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Lorenz Concentration Curves
Gini 0.470 Quasi-Gini 0.102 Kakwani
-0.369 i.e. progressive Kakwani measure shows
progressivity of spending or tax
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Reynolds-Smolensky
Gini 0.470 RS1 0.01282 Gini quasi-Gini of
net-of-subsidy disproportionality RS2
0.01234 Gini Gini of net-of-subsidy
redistributive capacity RS1 RS2 reflects
reordering a measure of horizontal inequity
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Cote dIvoire, education,1995 (1)
Primary Primary General secondary General secondary Technical secondary Technical secondary Tertiary Tertiary
Pop. Quintile CFAF /cap CFAF /cap CFAF /cap CFAF /cap
1 6,908 19 1,459 7 0 0 1,633 12
2 7,562 21 5,028 23 5 0 300 2
3 8,676 24 3,724 17 14 0 389 3
4 7,922 22 3,245 15 23 1 1,528 12
5 5,015 14 7,977 37 3,405 99 9,407 71
All 7,215 100 4,287 100 690 100 2,653 100
share 49 29 5 18
Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12.
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Cote dIvoire, education,1995 (2)
Subsidy, education Subsidy, education Share of Share of Using household quintiles Using household quintiles
Population Quintile Total m CFAF Per capita CFAF Household expenditure Total subsidy Per capita CFAF Total subsidy
1 28,477 10,000 13 13 10,362 19
2 36,794 12,895 11 17 12,912 19
3 36,231 12,802 7 17 12,436 18
4 36,499 12,718 5 17 19,251 22
5 73,589 25,803 5 35 28,240 21
All 211,591 14,845 6 100 14,845 100
Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12. Source Demery 2000, p.12.
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Peru, social subsidies
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Case Ghana, health (1)
Government unit health-care subsidies, 1992 Hospital Hospital Primary facilities
Government unit health-care subsidies, 1992 In-patient Out-patient Primary facilities
E, Volta, Ashanti, W, regions
Total Expenditure (000 cedis) 4,613,785 1,718,861 1,306,392
Cost Recovery (000 cedis) 66,344 733,799 479,149
Net Expenditure (000 cedis) 4,547,441 985,063 827,243
Visits (000) 319,8 1,347.7 1,156.9
Subsidy per visit (cedis) 14,427 1,275 1,129
Greater Accra
Total Expenditure (000 cedis) 3,657,479 1,362,590 937,148
Cost Recovery (000 cedis) 4,696 256,182 69,347
Net Expenditure (000 cedis) 3,652,783 1,106,408 867,800
Visits (000) 73.8 337.0 144.4
Subsidy per visit (cedis) 49,553 4,044 6,489
Source Demery (2000) Source Demery (2000) Source Demery (2000) Source Demery (2000)
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Case Ghana, health (2)
Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992 Health service visits, as of persons reported ill or injured, Ghana, 1992
1 2 3 4 5 All Urban Rural
Public providers 22.8 24.5 24.5 23.6 27.9 25.0 30.5 22.3
Hospital - in 0.7 0.9 0.6 1.0 1.1 0.9 1.0 0.8
Hospital Out 12.0 12.2 12.6 12.8 15.9 13.4 18.7 10.8
Clinics/hlth ctrs 10.1 11.4 11.4 9.8 10.9 10.8 10.9 10.6
Private providers 18.7 20.9 21.9 27.2 28.7 24.2 26.9 22.9
Modern 14.3 156 17.4 20.6 23.9 19.0 22.0 17.6
Traditional 4.4 5.5 4.5 6.6 4.8 5.2 4.9 5.3
Self/no treatment 58.5 54.5 53.6 49.1 43.3 50.8 42.6 54.8
Source Demery (2000) Source Demery (2000) Source Demery (2000) Source Demery (2000) Source Demery (2000) Source Demery (2000) Source Demery (2000) Source Demery (2000) Source Demery (2000)
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Case Ghana, health (3)
1992 Primary facilities Primary facilities Hospital outpatient Hospital outpatient Hospital inpatient Hospital inpatient
Pop. Quintile cedis /cap cedis /cap cedis /cap
1 661 10 1,079 13 555 11
2 1,082 17 1,242 15 741 14
3 1,202 19 1,432 17 1,058 20
4 1,460 23 1,564 19 1,203 23
5 1,966 31 2,883 35 1,666 32
All 1,274 100 1,640 100 1,045 100
share 32 41 26
Source Demery 2000, p.34. Source Demery 2000, p.34. Source Demery 2000, p.34. Source Demery 2000, p.34. Source Demery 2000, p.34. Source Demery 2000, p.34. Source Demery 2000, p.34.
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Case Ghana, health (4)
1992 Subsidy, health Subsidy, health Share of Share of
Population Quintile Total 000 cedis Per capita Cedis Household expenditure Total subsidy
1 6,840,892 2,296 3.5 12
2 9,133,250 3,065 3.1 15
3 11,003,645 3,692 2.8 19
4 12,599,421 4,228 2.3 21
5 19,414,622 6,515 1.8 33
All 58,991,829 3,959 2.4 100
Source Demery 2000, p. 34. Source Demery 2000, p. 34. Source Demery 2000, p. 34. Source Demery 2000, p. 34. Source Demery 2000, p. 34.
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Case Ghana, health (5)
Male Male Male Female Female Female Total Total
Quintile Mean subsidy (cedis) Column share () Row share () Mean subsidy (cedis) Column share () Row share () Mean subsidy (cedis) Column share ()
1 2,583 15 56 2,014 9 44 2,296 12
2 2,977 17 48 3,149 14 52 3,065 15
3 4,405 23 55 3,082 15 45 3,692 19
4 3,372 19 38 5,019 23 62 4,228 21
5 4,581 26 35 8,433 38 65 6,515 33
Ghana 3,576 100 44 4,321 100 56 3,959 100
Source Demery (2000), p.35. Source Demery (2000), p.35. Source Demery (2000), p.35. Source Demery (2000), p.35. Source Demery (2000), p.35. Source Demery (2000), p.35. Source Demery (2000), p.35. Source Demery (2000), p.35. Source Demery (2000), p.35.
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Case Ghana, health (6)
Affordability Ratios for Publicly-Provided Health Care, 1992 Affordability Ratios for Publicly-Provided Health Care, 1992 Affordability Ratios for Publicly-Provided Health Care, 1992 Affordability Ratios for Publicly-Provided Health Care, 1992 Affordability Ratios for Publicly-Provided Health Care, 1992 Affordability Ratios for Publicly-Provided Health Care, 1992 Affordability Ratios for Publicly-Provided Health Care, 1992
Household spending/visit (cedis) Household spending/visit (cedis) Household spending/visit (cedis) of non-food expenditure of non-food expenditure of non-food expenditure
Hospital Hospital Clinics Hospital Hospital Clinics
Outpatient Inpatient Outpatient Inpatient
1 1,352 9,753 989 5.4 38.8 3.9
2 1,452 7,746 796 3.5 18.7 1.9
3 1,510 6,776 843 2.7 12.2 1.5
4 1,764 14,235 1,252 2.3 18.3 1.6
5 1,744 20,834 941 1.0 12.4 0.6
Ghana 1,606 13,750 957 2.2 18.6 1.3
Urban 1,916 11,598 1,167 2.2 18.6 1.0
Rural 1,355 14,919 856 2.5 27.7 1.6
Source Demery (2000), p.41. Based on Ghana Living Standards Survey 1992. Spending includes fees and medication costs only. Source Demery (2000), p.41. Based on Ghana Living Standards Survey 1992. Spending includes fees and medication costs only. Source Demery (2000), p.41. Based on Ghana Living Standards Survey 1992. Spending includes fees and medication costs only. Source Demery (2000), p.41. Based on Ghana Living Standards Survey 1992. Spending includes fees and medication costs only. Source Demery (2000), p.41. Based on Ghana Living Standards Survey 1992. Spending includes fees and medication costs only. Source Demery (2000), p.41. Based on Ghana Living Standards Survey 1992. Spending includes fees and medication costs only. Source Demery (2000), p.41. Based on Ghana Living Standards Survey 1992. Spending includes fees and medication costs only.
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Comments health in Africa

• Health spending is progressive, but not well
  targeted (Castro-Leal et al. 1999, p.55.)
• Five factors affect use
• Income. Normal good. So hard to target to poor.
• Quality. Worse quality for poor.
• Access. Halve distance, double use (Ghana)
• Price. Fees deter poor more than rich.
• Gender. Supply side (clinics serving poor may
  not provide right care) or demand (poor hh dont
  encourage women to use)?

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Case Education in Africa (1)
Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries Benefit Incidence of Public Spending on Education in Selected African Countries
Quintile shares of total spending Quintile shares of total spending Quintile shares of total spending Quintile shares of total spending Quintile shares of total spending Quintile shares of total spending Quintile shares of total spending Quintile shares of total spending Tot sub. as share of hh exp Tot sub. as share of hh exp
Primary Primary Secondary Secondary Tertiary Tertiary Total Total Tot sub. as share of hh exp Tot sub. as share of hh exp
Poor Rich Poor Rich Poor Rich Poor Rich Poor Rich
Cote dIvoire, 1995 19 14 7 37 12 71 13 35 12.5 4.6
Ghana, 1992 22 14 15 19 6 45 16 21 13.4 3.1
Guinea, 1994 11 21 4 39 1 65 5 44
Kenya, 1992 22 15 7 30 2 44 17 21 27.8 1.9
Malawi, 1994 20 16 9 40 1 59 16 25 2.3 1.4
Madagascar, 1993 17 14 2 41 0 89 8 41 7.2 3.4
South Africa, 1994 19 28 11 39 6 47 14 35 42,1 5.1
Tanzania, 1993/94 20 19 8 34 0 100 14 37
Uganda, 1992 19 18 4 49 66 47 13 32 4.3 1.5
Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64. Source Castro-Leal et al, 1999, p.64.
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Case Education in Africa (2)

• Who benefits from education subsidies?
• Progressive, but poorly targeted
• Demand depends on
• Income. So rich will send kids to poor more at
  all levels.
• Quality. Poorer quality for poor.
• Costs.
• Fees, etc. disproportionately deter poor.
• Distance (to secondary!) deters poor.
• Gender bias common

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Tax case Lebanon 2004 (1)

• Govt. debt is 185 of GDP
• Debt trap looming
• Tax system is a muddle
• Goal of change
• Raise mobilization by 3 of GDP
• Make tax system more efficient
• Deadweight loss compliance costs administrative
  costs
• Maintain or enhance equity
• NB Need to treat changes as a package

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Tax case Lebanon 2004 (2)

• Technique
• For each tax, determine incidence
• VAT in proportion to consumer spending, which
  needs survey data to measure
• Wage tax in proportion to wages
• Interest tax in proportion to assets
• Property tax in proportion to housing owned
• NB Needed survey data with both income and
  expenditure information
• Incorporate some behavior
• Elasticities for alcohol, tobacco excises
• VAT avoidance/evasion as function of rate
• Spreadsheet allowing easy simulation of packages
  of changes, invoking Stata see example on next
  page
• A very useful tool

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Issue 1 Average vs. Marginal

• Results show average incidence
• Dont show incidence of additional (marginal)
  spending
• Dont show incidence of lower user fees with
  associated lower coverage
• Younger In Africa, early capture is by more
  affluent
• Implication marginal incidence is more
  progressive than average incidence
• Put another way, coverage and incidence are
  correlated
• To measure marginal effects
• Use spatial variation (Lanjouw Ravallion,
  India)
• Use time series variation
• Use demand estimates (Younger)

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From Vietnam Panel
Share of 1993 transfers Share of 1998 transfers Share of total transfer increase, 1993-98
1993
1 13.3 13.1 12.8
2 15.2 15.5 15.7
3 16.9 17.5 17.9
4 21.2 22.4 23.4
5 33.3 31.6 30.2
Total 100.0 100.0 100.0
1998
1 15.3 15.7 16.0
2 14.0 15.4 16.6
3 20.5 19.6 18.9
4 19.8 19.9 20.0
5 30.4 29.3 28.5
Total 100.0 100.0 100.0
Van de Walle, p.77. Covers social transfer income. Based on VLSS 1993 and 1998 Van de Walle, p.77. Covers social transfer income. Based on VLSS 1993 and 1998 Van de Walle, p.77. Covers social transfer income. Based on VLSS 1993 and 1998 Van de Walle, p.77. Covers social transfer income. Based on VLSS 1993 and 1998
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Issue 2 Incorporating Behavior

• Up to now, an accounting exercise
• beneficiary incidence (Demery)
• van de Walle
• VLSS 93 98 with N4,308 panel
• ?Cit ß ?Tit ? ?Xit ?dt ?eit
• Estimates ß0.45, t4.3.
• Evidence from elsewhere ß0.5.
• Incentive effects of welfare payments also strong
  in US, Ireland, etc.

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Issue 3 Valuing benefits

• Cost of provision (unit costs) only OK if
• Government is efficient, honest
• AC MC
• Equals average of individual marginal valuations
• Contingent valuation
• How much is the service worth?
• With public goods, the least bad alternative
• Compensating variation
• Based on estimating demand curve
• 0/1 index
• 1 participate, 0 otherwise
• Equivalent to constant value for all beneficiaries

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Issue 4 Pieces or Total?

• Demery
• Focus on one item at a time
• which expenditure items are most efficient at
  transferring income to the poor?
• Meerman, JH
• Tax-transfer system is a package makes sense to
  consider as a whole
• Jenkins Design taxes to collect revenue
  efficiently take care of distributional issues
  on the expenditure side

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Issue 5 What counterfactual?

• Methods take current expenditure, income as
  given then add government spending.
• But if government has already pumped up mid- and
  high incomes, progressivity of a given item will
  be overstated

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Issue 6 Deep causes

• Difficult to use findings for policy, unless one
  has a theory
• E.g. If girls get 30 of educational spending,
  what does it imply for policy? Perhaps parents
  are keeping girls home
• Why does government allocate its spending the way
  it does now?
• Political economy issues
• Recommendations must be politically feasible

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Parting caveat

• Demery cautions
• Public expenditures can be effective in reducing
  poverty only when the policy setting is right.
• E.g. Why spend on ag. Extension if overvalued
  exchange rate makes farming unprofitable.
• Analysis assumes public expenditure process is
  based on outcomes and impacts and not just line
  items.
• Public expenditure decisions must rest on a
  sound understanding of the needs and preferences
  of the population at large.
• Otherwise, benefits incidence analysis is
  unlikely to have much useful impact.
• JH Incidence analysis probably more helpful on
  the tax than on the spending side
• but needs survey data with income and
  expenditure