# **_a) Subsidies and contributions in utilities_**

In Colombia, the socioeconomic stratification of dwellings is used as the main tool for targeting the subsidy mechanism<sup>9</sup> for utilities established by law 142 of 1994. According to this stratification, dwellings are classified into six strata based on observable characteristics of their exterior.<sup>10</sup> Housing classified as the poorest, from its external features, belongs to stratum 1, while stratum 6 is composed of the dwellings identified as those with the highest income.

Law 142 of 1994 establishes that dwellings classified in strata 1, 2, and 3 receive a subsidy on the utility rates of up to 70, 40, and 15 percent respectively. Those users residing in strata 4 dwellings pay the full rate, while users in strata 5 and 6, industrial users, and commercial users pay an extra cost of up to 60 percent.<sup>11</sup> The contributions made are used to offset part of the subsidies. However, there is a deficit that must be covered by the national government. In 2017, this deficit amounted to 2,433 billion pesos, which represents 0.3 percent of GDP.<sup>12</sup> Out of this deficit, 61.2 percent corresponds to the difference between subsidies and contributions for electricity.<sup>13</sup>

# **_b) Social spending in Colombia_**

Over the past decade, the public social spending by the Central National Government has remained relatively stable at around 13 percent of GDP. The spending of the highest import is on labor and social security, which accounts for 6.4 percent of GDP in 2017 and 49.4 percent of total social spending. However, its importance has been declining over the past decade (Figure II-1). The most important item of this expenditure (labor and social security) is pensions, which represent 57 percent in 2017 and amount to 28 percent of public social spending and 3.6 percent of GDP in the same year.

Public spending on education and health follows in importance with 3.1 and 2.8<sup>14</sup> percent of GDP respectively. Both expenses represent 45.5 percent of total social expenditures (education 24 percent and health 21.5 percent). Health spending has been growing over the last decade, with a significant leap in 2014 that may be due to the implementation of the CREE wealth tax.<sup>15</sup> This tax replaced payments to SENA, ICBF, and health made by employers for workers who earn less than 10 monthly minimum wages and which are partially used to finance the health care system. The social security contributions that also fund the contributory health system do not constitute collections, nor are they part of the budget. Finally, spending in other sectors such as housing, water and sanitation, and culture and sports amount to 5.1 percent of total social expenditures and 0.66 percent of GDP. A brief description follows of the components of social spending and the programs included in the incidence analysis.<sup>16</sup>

> 9 In this document, subsidies refer to indirect transfers via price delivered by the government. Whenever reference is made to transfers, it refers to direct transfers, that is, the delivery of money that the government provides to households. Fuel subsidies were not included in this version.

> 10 For more details, see annex IV, in Nuñez et, al. (2019).

> 11 For further information on the conditions and operation of subsidies and contributions, see annex IV, in Nuñez et, al. (2019).

> 12 The number refers to the deficit when only regular users who belong to interconnected areas are considered in electricity.

> 13 Data downloaded from the Utilities Information System on March 19, 2019. It is important to mention that the wide deficit in energy is partly due to the fact that decree 2860 of 2012 excluded industrial establishments from payment of contributions for this service.

> 14 There is a need to clarify that these amounts refer to central government spending and exclude the spending of local administrations. Meanwhile, the amounts found in Table I-2 include both central government’s spending as well as that of local administrations.

> 15 Firm Tax (CREE) created by Law 1607 of 2012 that taxes business profits at a 9 percent rate between 2013 and 2015 and 8 percent onwards.

> 16 For a description of the methodology employed, see annexes II, V and VI in Nuñez et, al. (2019).

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