# **1. INTRODUCTION**

Since the early 2000s, Chile adopted an integral approach to social policy to gradually incorporate a set of multi-sectorial programs and interventions that sought to serve as a buffer to negative shocks. The introduction in 2002 of _Chile Solidario_ as a strategy to overcome extreme poverty, the health reform of 2004 that created the _Plan AUGE_ / _GES_ to reduce horizontal inequalities in the access to health care,<sup>1</sup> the social security reform of 2008 that introduced a non-contributory component of the pension system ( _Pensiones Solidarias_ ), the creation of the subsystem for comprehensive early childhood protection ( _Chile Crece Contigo_ ), and the launch of the subsystem of social protection and opportunities ( _Ingreso Ético Familiar_ )<sup>2</sup> have shaped a social protection system with a life-cycle perspective, combining universal and targeted coverage for specific groups with certain degrees of vulnerability. Through 295 social programs; 130 actions related to scholarships, pensions and subsidies; and a budget of around 10 percent of the GDP by end-2015, Chile’s social policy delivers direct and in-kind transfers, family allowances, non-contributory pensions, and other types of social spending, including psychosocial support, technical advice, training, and credit and funding for productive projects.

The significance given to social policy is evidenced by the increase of per capita public social expenditure during the last decade, which occurred at an annual rate of 6.8 percent in real terms.<sup>3</sup> During this period, the incidence of income-based poverty in Chile has significantly declined.<sup>4</sup> The headcount for extreme poverty reduced from 12.6 percent in 2006 to 3.5 percent in 2015, equivalent to an average decline of 1 percentage point yearly, whereas the incidence of moderate poverty changed from 29.1 to 11.7 percent for an annual average decline of 1.9 percentage points. In the case of income inequality, changes in the Gini coefficient show a declining trend, although they were not statistically significant between 2006 (0.499) and 2013 (0.491), and it was until 2015 that inequality registered a significant reduction (0.482).<sup>5</sup> In such context, this paper applies a comprehensive tax-benefit incidence analysis to estimate the effects that public social spending, hand in hand with the tax system, exert on poverty and inequality indicators in Chile using household-level data and administrative records for 2013. Specifically, the analysis presented in the next sections evaluates the concentration and incidence of several fiscal instruments in Chile —including direct and indirect taxes, contributory and non-contributory pensions, direct transfers, indirect subsidies, and in-kind government transfers in the form of health and education— to address five questions. First, who bears the tax burden and receives the benefits from social spending? Second, are fiscal interventions in Chile equalizing? Third, are they poverty-

> 1 The Plan AUGE (Universal Access to Explicit Guarantees), now called GES (Explicit Guarantees in Health), guarantees the coverage of 80 diseases by the public National Health Fund (FONASA) and the private health system (ISAPRE).

> 2 This program was introduced to replace and extend the benefits of _Chile Solidario_ .

> 3 This rate of change was calculated using the OECD social expenditure database (OECD, 2016a).

> 4 In 2015, a multi-dimensional poverty measure was officially introduced to assess non-monetary deprivations of households. This measure considers four equally-weighted dimensions, each measured through three indicators: education (school attendance, years of schooling and underachievement), health (child malnutrition, access to the health system, and medical care), labor and social security (access to social security, employment status, and retirement), and housing (overcrowding, dwelling conditions and access to basic services).

> 5 Official figures on poverty incidence and income inequality are taken from Ministerio de Desarrollo Social (2016).

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