||Who is Protected? On the Incidence of Fiscal Adjustment
||February 12, 2002
||Adobe Acrobat (PDF) [166 KB]
Standard policy advice at times of fiscal adjustment is to protect public spending on the poor. However, there is remarkably little theory or evidence to draw on in assessing the case for such policies. To help fill this gap, the paper begins with a theoretical model of the incidence of fiscal expansions and contractions, identifying conditions under which the poor will be exposed to cuts without a policy change. The paper then studies various social programs in Argentina, Bangladesh and India, focusing on how targeting performance varied with aggregate outlays. The results suggest that it tends to be program spending on the non-poor that is protected from budget cuts. Drawing on these results, recommendations are made for more effective safety nets in developing countries.