ASSESSING THE IMPACT OF FISCAL POLICIES ON POVERTY ALLEVIATION AND INCOME DISTRIBUTION: THE CASE OF MALAWI

Abstract

Malawi continues to face poverty and income inequality despite efforts in government's spending and tax policies. A substantial portion of the population remains impoverished, and income disparities persist. This study examines the impact of government fiscal policies on poverty and income distribution. It analyzes how budget allocations and taxation affect poverty levels and income distribution, offering insights and recommendations for policymakers to balance fiscal responsibility with social development. The study develops "Income Concepts" to measure income with and without fiscal policy elements, using a Commitment to Equity approach. To measure the impact of fiscal policy and establish causal attribution, it employs Propensity Score Matching (PSM). The analysis reveals that while fiscal systems slightly reduce inequality, their net effect on poverty is mixed. Income differences with and without fiscal policies show a mean increase of MWK 12,368.40, indicating a limited impact. The Gini coefficient slightly increases from 0.428 to 0.434, suggesting that fiscal policies alone do not significantly reduce inequality. The SCTP positively impacts welfare, increasing beneficiaries' per capita consumption by 13.4%. Conversely, FISP does not significantly affect per capita consumption, raising questions about its effectiveness. Educational expenditures positively impact welfare, while health expenditures show no significant effect. Overall, the findings suggest that fiscal policies have some positive effects, particularly in reducing inequality and supporting poor households. However, there is a need for restructuring and more targeted approaches. Eliminating less effective subsidies and reallocating resources towards direct support for poorer households could enhance the overall impact of fiscal policies on poverty and inequality reduction in Malawi.