A new report from the World Bank suggests that Armenia could achieve its revenue, education, and sustainable growth targets by making its tax system fairer and investing in educational quality. This report is the second part of a Public Finance Review series analyzing various aspects of Armenia's fiscal policy.
The first edition, released in 2023, focused on capital investments and spending in social protection and health. The current edition examines the efficiency and equity of Armenia’s tax system and public spending in education, offering policy recommendations for optimizing public finances.
Armenia has improved its tax collection recently, with a tax-to-GDP ratio averaging around 24% between 2021-2023. However, this falls short of the government's target of 25%. To address this gap, the report recommends broadening the regular tax regime to include more businesses under similar taxation rules. It also suggests narrowing the turnover tax regime's coverage and preventing specific industries from receiving special tax treatment. Modernizing international tax rules to accommodate the digital economy is another recommendation.
The report advises introducing deductions for low wage-earners who face high income costs. Although Armenia has environmental taxes and fuel excise taxes, these are considered low by regional standards. The report proposes introducing a direct carbon price through an upstream tax on natural gas and oil importers to encourage greener growth.
"Over the last decades, Armenia has made commendable progress in raising its tax to GDP ratio," said Carolin Geginat, World Bank Country Manager for Armenia. "Armenia’s tax regime could positively contribute to formal job creation by lowering the tax burden on low-income earners."
In terms of education spending efficiency, despite high enrollment rates, Armenia faces challenges related to learning quality and access to pre-primary and higher education. In 2022, only 43.4% of children from poor families attended pre-primary education while only 17.2% accessed higher education.
Students spend about 11.3 years in school but leave with only eight years' worth of effective schooling due to learning deficiencies. Other issues include limited access to quality pre-primary education and insufficient vocational training.
The report outlines several steps for improvement: expanding pre-primary coverage, enhancing teaching quality, optimizing school sizes, investing in vocational training, and increasing financial aid for low-income students pursuing higher education.
Additionally, reforming governance structures within educational institutions is seen as crucial for developing a workforce equipped with modern skills needed by emerging industries.
This report is part of ongoing collaboration between the World Bank and Armenian government aimed at supporting development goals in education.