# **1. INTRODUCTION**

In the last 15 years, Latin America has experienced large improvements in social spending. In all but one country, social spending rose from an average of 9.8 percent of GDP in 1990, to 12.3 in 2003 (CEPAL, 2006). Increased spending is also reflected in increased taxation, which rose from an average of 12.2 percent in 1990, to 16.3 percent in 2003.

But who is benefiting from higher social spending? And where is the Latin American welfare state headed: towards a minimalist, liberal, US-style social state, or towards a more comprehensive, social-democratic, European-style one? Finally, will Latin America be able to continue financing the expansion of its welfare state? Studies that review existing incidence analyses on social spending in Latin America (CEPAL, 2006; López, 2006) find social spending to be fairly flat across income quintiles, achieving little redistribution. These studies, however, look at the spending side, while redistribution is an equilibrium outcome of both spending and taxation; that is, if everybody would receive an amount equal to their contributions there would be _de facto_ no redistribution.

In this paper we present an incidence analysis of both social spending and taxation for seven Latin American countries, the United Kingdom, and the United States. Consistent with previous studies, we do find absolute levels of social spending in Latin America to be fairly flat across income quintiles – and for some countries, to be even regressive. This contrasts the much more progressive pattern of social spending of the United Kingdom (which itself spends less on the poor than most European countries), and brings Latin American welfare states closer to the US model, where social spending also remains fairly flat across income quintiles. The structure of taxation in Latin America is also very similar to the one of the United States: high income inequality constrains Latin American countries to tax mostly the rich, a pattern – though to a lesser extent – also observed in the United States, while the United Kingdom can afford to tax more its middle class.

Our comparison of social spending and taxation therefore strongly points that Latin American countries are headed towards a minimalist welfare state similar to the one of the United States, rather than towards a stronger, European-like one. The high contributions of the rich to tax revenues are a serious obstacle to the further expansion of the welfare state, as the rich may feel to contribute excessively to the welfare state, without receiving much back. The roots of this bottleneck clearly lay in the high levels of income inequality pervading Latin America: although as a proportion of their income the rich do not necessarily contribute more than in Europe, because of high income inequality their contributions to tax revenues must be much higher.

The recent increased socioeconomic instability in many Latin American countries shows nonetheless a real need for a stronger welfare state, which, if unanswered, may degenerate into short term and unsustainable populist policies. Actions need therefore to be taken, and elites have to choose between losing power and assets to strongly leftleaning governments, or to engage into the development of more inclusive social contracts. We believe that a way out from this apparent dead end can be found. The case 2