Figures and tables in Economy-Wide Effect of Fiscal Drag in Ethiopia

Abstract

This study evaluates the economy-wide effect of fiscal drag in Ethiopia, focusing on household consumption expenditure and income. Drawing on a prior study that used the ETMOD tax-benefit micro-simulation model and assessed the effect of fiscal drag on income distribution and work incentives, this study uses a static CGE model. The simulation introduces a 9.1 percent increase in the average income tax rate due to the failure of the tax system to update the monetary tax parameters for inflation. The study allows for unemployment in agricultural labor, and four critical conclusions are drawn from the empirical investigation. First, fiscal drag reduces consumption expenditure by urban non-poor households but fosters consumption outlays by the urban poor, rural poor, and rural non-poor households due to a fall in saving that outweighs the negative impact due to the increase in the income tax rate for the three household categories. Second, an inflation-driven increase in income tax rates decreases disposable income for urban households while increasing the disposable income of rural counterparts who face higher prices of their factors of production. Third, fiscal drag slightly increases economic growth, household consumption, and export but reduces imports. Fourth, the upsurge in revenue from direct tax due to fiscal drag more than offsets the fall in government revenue from indirect taxes mainly due to the reduction of consumption of the urban non-poor households.

This article contains 5 figures and 12 tables.

Figures

**Figure 1.** Circular flow diagram. Source: Own elaboration.

**Figure 2.** Trend of direct tax in Ethiopia. Source: Own computation.

**Figure 3.** Income tax revenue, income, and effective tax rates by household types. Source: Own computation.

**Figure 4.** Bottom-up approach. Source: Adapted from Bourguignon and Bussolo (2013).

**Figure A1.** Production technology. Source: Own elaboration.

Tables

Table 1. Percentage change in household consumption and income.

Household types	Household consumption	Household income
Urban poor	1.31	-0.06
Urban non-poor	-0.75	-0.08
Rural poor	0.70	0.16
Rural non-poor	0.33	0.07

Source: Own computation.

Table 2. Share of consumption and changes in household consumption and production.

Item	Share of consumption by urban non-poor	Household consumption expenditure				Production
Item	Share of consumption by urban non-poor	Urban Poor	Urban non-poor	Rural poor	Rural non-poor	Production
Grain	20.65	0.16	- 0.09	0.38	0.18	0.14
Livestock	28.92	1.67	-0.95	0.87	0.40	0.10
Hotel	41.58	1.86	-1.01	0.63	0.30	-0.13
Forest	18.53	2.06	-1.13	1.26	0.59	0.37
Agro-processing	25.39	0.16	-0.09	0.38	0.18	0.14
Other service	60.88	1.87	-1.00	0.64	0.31	-0.14
Real estate	63.86	1.88	-0.99	0.65	0.32	-0.34
Transport	52.93	1.87	-1.00	0.64	0.31	0.13
Alcohol	53.91	0.17	-0.09	0.39	0.19	0.06
Textile	27.11	0.92	-0.50	0.88	0.42	0.31

Source: Own computation.

Table 3. Percentage change in factor demand by selected activities.

Items	Agricultural labor	Agricultural capital	Semi-skilled labor	Skilled labor	Other capital
Grain			0.17	0.19	0.22
Livestock	0.20	0.04
Hotel			-0.11	-0.10	-0.07
Forest	0.40	0.23
Agro-processing			0.16	0.18	0.21
Other services			-0.15	-0.13	-0.11
Real estate			-0.38	-0.37	-0.34
Transport			0.12	0.14	0.16
Alcohol			0.03	0.04	0.07
Textile			0.28	0.30	0.33

Source: Own computation.

Table 4. Macroeconomic effects of an increase in the income tax rate.

Real GDP	0.04
Real domestic production	0.04
Real household consumption	0.03
Real domestic final demand	0.02
Real import	-0.05
Real export	0.03
Real intermediate input	0.05

Source: Own computation.

Table 5. Effects of an increase in the income tax rate on government income and expenditure.

Direct tax	9.05
Import tax	-0.02
Sales tax	-0.11
VAT	-0.38
Excise tax	-0.04
Government income	2.89
Government expenditure	-0.08
Government savings	6.91

Source: Own computation.

Table A1. Balanced Macro SAM for the year 2015/16.

		Activity			Commodity			Margin		Factor			Household			Tax		Govt	Kapital	World	Total
		Agri	Indus	Service	Agri	Indus	Service	Margin		Labor	Land	Capital	Urban		Rural	direct		Govt	Kapital	World	Total	Indirect
Activity	Agri				649																649
	Indus					1,124															1,124
	Service						806														806
Commodity	Agri	48	320	65								89		199					10	48	779
	Indus	46	365	114								201		342				0	531	13	1,613
	service	4	77	125				172				169		138				166	0	67	917
Margin					98	70	4														172
Factor	Labor	357	221	333																	911
	Land	20																			20
	Capital	174	142	168																	483
Household	Urban								468	0	150							1		66	686
Household	Rural								443	20	333							2		70	868
Tax	Direct											60		12							72
Tax	Indirect					82	33														115
Govt												45			72		115			30	262
Kapital												123		176				92		150	541
World					32	338	74														445
Total		649	1,124	806	779	1,613	917	172	911	20	483	686		868	72		115	262	541	445

Source: Own computation.

Table A2. Percentage change in Factor prices.

Non-irrigated land	Irrigated land	Agricultural capital	Semi-skilled labor	Skilled labor	Other capital
0.27	1.83	0.20	-0.07	-0.07	-0.12

Source: Model simulation results.

Table A3. Percentage distribution of household income by factor types.

Factor types	Urban poor	Urban nonpoor	Rural poor	Rural nonpoor
Agricultural labor	2.37	0.15	94.54	28.12
Non-irrigated land	0.16	0.04	5.23	1.08
Irrigated land			0.23	0.45
Agricultural capital	1.07	0.06		28.84
Semi-skilled labor	41.39	47.22
Skilled labor	55.01	25.43		14.83
Other capital		27.10		26.68

Source: Model simulation results.

Table A4. Percentage change in unemployment.

Unemployment in agricultural labor
-8.24

Source: Model simulation results.

Table A5. List of main Account of the 2015/16 SAM for Ethiopia.

Activities			Commodities			Factors	Households	Taxes
Tef Barley Wheat Maize Sorghum Finger millet Oats Rice Horse beans Peas Haricot bean Lentils Vetch Other pulse Neug / niger Linseed Groundnuts Sesame Other cereals Other spices Other oilseeds Peppers Other vegetables Onion Potato and sweet potato Garlic Taro_godere Other roots Bananas Other fruits	Chat Coffee Cotton Hops/gesho Sugarcane Enset Flower Livestock Forest Fishing Preserve Vegetable oil Dairy Grain Bakery Sugar Agro processing Animal feed Alcohol Soft Tobacco Textile Apparel Leather Wood Paper Print Chemical Ink Soap detergent	Pharmaceutical Rubber Nonmetals Metal Electrical Machinery Furniture Construction Water Transport Trade Real Public administration Private household Other service Hotel Health Entertainment Electricity Education Banking	Teff Barley Wheat Maize Sorghum Finger millet Oats Rice Horse beans Peas Haricot bean Lentils Vetch Other pulse Neug/ niger Linseed Groundnuts Sesame Other cereals Other spices Other oilseeds Peppers Other vegetables Onion Potato and sweet potato Garlic Taro_godere Other roots Bananas Other fruits	Chat Coffee Cotton Hops Sugarcane Enset Flower Livestock Forest Fishing Preserve Vegetable oil Dairy Grain Bakery Sugar Agro processing Animal feed Alcohol Soft Tobacco Textile Apparel Leather Wood Paper Print Chemical Fert Ink	Soap detergent pharmaceutical Rubber Nonmetals Metal Electrical Machinery Furniture Gas Construction Water Transport Trade Real Public administration Private household Other service Hotel Health Entertainment Electricity Education Banking	Agricultural labor Non irrigated land Irrigated land Agricultural capital Skilled labor Semiskilled labor Other capital	Urban poor Urban nonpoor Rural poor Rural nonpoor	Direct tax Sales tax VAT Excise tax Import tax

Source: Own compilation.

Table A6. Income elasticities for Ethiopia.

Commodities	Urban poor household	Urban non-poor household	Rural poor household	Rural non-poor household
Teff	1.14	1.14	1.08	1.08
Barley	0.33	0.33	0.06	0.06
Wheat	0.41	0.41	0.42	0.42
Maize	0.58	0.58	0.62	0.62
Sorghum	- 0.81	- 0.81	1.00	1.00
Finger millet	- 0.81	-0.81	1.00	1.00
Oats	0.33	0.33	0.64	0.64
Rice	0.13	0.13	0.64	0.64
Horse beans	0.87	0.87	1.13	1.13
Peas	0.87	0.87	1.13	1.13
Haricot beans	0.87	0.87	1.13	1.13
Lentils	0.87	0.87	1.13	1.13
Vetch	0.87	0.87	1.13	1.13
Other pulse	0.87	0.87	1.13	1.13
Neug	2.10	2.10	0.96	0.96
Linseed	2.10	2.10	0.96	0.96
Groundnuts	2.10	2.10	0.96	0.96
Sesame	2.10	2.10	0.96	0.96
Other cereals	-6.70	-6.70	2.30	2.30
Other spices	0.67	0.67	0.30	0.30
Other oilseeds	2.10	2.10	0.96	0.96
Peppers	0.67	0.67	0.30	0.30
Other vegetable	0.87	0.87	0.95	0.95
Onion	0.87	0.87	0.95	0.95
Potato and sweat potato	0.59	0.59	0.18	0.18
Garlic	0.67	0.67	0.30	0.30
Taro godere	0.59	0.59	0.18	0.18
Other root crop	0.59	0.59	0.18	0.18
Bananas	0.87	0.87	0.95	0.95
Other fruits	0.87	0.87	0.95	0.95
Chat	0.85	0.85	1.39	1.39
Coffee	0.85	0.85	1.39	1.39
Cotton	0.85	0.85	1.39	1.39
Hops	0.85	0.85	1.39	1.39
Sugarcane	0.85	0.85	1.39	1.39
Enset	- 0.39	-0.39	2.12	2.12
Flower	1.50	1.50	1.72	1.72
Livestock	1.23	1.23	1.22	1.22
Forest	1.50	1.50	1.72	1.72
Fishing	0.12	0.12	0.52	0.52
Preserve	0.12	0.12	0.52	0.52
Vegetable oil	0.90	0.90	0.83	0.83
Dairy	0.12	0.12	0.52	0.52
Grain	0.12	0.12	0.52	0.52
Bakery	0.12	0.12	0.52	0.52
Sugar	0.96	0.96	0.16	0.16
Argo-processing	0.12	0.12	0.52	0.52
Animal feed	0.12	0.12	0.52	0.52
Alcohol	0.12	0.12	0.52	0.52
Soft drinks	0.12	0.12	0.52	0.52
Tobacco	1.50	1.50	1.72	1.72
Textile	0.67	0.67	1.19	1.19
Apparel	0.67	0.67	1.19	1.19
Leather	0.67	0.67	1.19	1.19
Wood	1.50	1.50	1.72	1.72
Papier	1.50	1.50	1.72	1.72
Print	1.50	1.50	1.72	1.72
Chemicals	1.50	1.50	1.72	1.72
Fertilizer	1.50	1.50	1.72	1.72
Ink	1.50	1.50	1.72	1.72
Soap detergent	1.50	1.50	1.72	1.72
Pharmaceutical	1.50	1.50	1.72	1.72
Rubber	1.50	1.50	1.72	1.72
Non-metal	1.50	1.50	1.72	1.72
Metal	1.50	1.50	1.72	1.72
Electrical	1.50	1.50	1.72	1.72
Machinery	1.50	1.50	1.72	1.72
Furniture	1.50	1.50	1.72	1.72
Gas	1.50	1.50	1.72	1.72
Construction	1.50	1.50	1.72	1.72
Water	1.35	1.35	0.86	0.86
Transport	1.35	1.35	0.86	0.86
Trade	1.35	1.35	0.86	0.86
Real	1.35	1.35	0.86	0.86
Public	1.35	1.35	0.86	0.86
Private	1.35	1.35	0.86	0.86
Other service	1.35	1.35	0.86	0.86
Hotel	1.35	1.35	0.86	0.86
Health	1.35	1.35	0.86	0.86
Entertainment	1.35	1.35	0.86	0.86
Electricity	1.35	1.35	0.86	0.86
Education	1.35	1.35	0.86	0.86
Banking	1.35	1.35	0.86	0.86

Source: Own compilation based on Hertel (1997) and Tafere et al. (2010).

Table A7. Frisch elasticity

Urban poor household	Urban non-poor Household	Rural poor household	Rural non-poor household
-5.85	-5.85	-5.85	-5.85

Source: Own compilation based on Hertel (1997).