# **4. Benefit Incidence of Public Social Expenditure**<sup>**21**</sup>

32. **Who benefits from public social spending in Colombia?** In addressing this question, it is important to make a few distinctions. First, between monetary transfers (e.g. conditional cash transfers) and non-monetary public spending (e.g. on education). Monetary public transfers directly increase gross household incomes. Non-monetary public spending, on the other hand, affects households indirectly by potentially reducing their expenditures. The government provided education, for instance, frees up household spending for other purposes to the extent that households would have spent private resources on education in the absence of government intervention. A second relevant distinction relates to the financing side. Most publically provided services are financed over the national budget through general taxation. Some services, however, are financed through contributions or payroll taxes from formal workers and do not enter the national budget (see Text Box 1). Examples include ICBF (childhood support) and CCF (family subsidies), as well as the contributive health insurance regime. In the latter cases, one may naturally expect that the benefits are received by the contributors (often concentrated in the 2-3 richest quintiles) rather than the general population. On the other hand, there is nothing to prevent such programs from serving re-distributive purposes, which some indeed do.

33. **In Colombia, total monetary transfers are regressive while non-monetary public spending is generally progressive.** Sizeable pension transfers, mainly benefitting the rich, result in a highly regressive distribution of public monetary transfers, with some compensation provided by the relatively small (in fiscal terms), but well-targeted conditional cash transfers to the poor. Public, nonmonetary spending programs, such as pre-school and primary education, the subsidized health insurance regime, and early childhood programs are progressive.

## **4.1 Public Monetary Transfers**

34. **Publically financed monetary transfers from the central government to the Colombian population increase income inequality by one Gini point.**<sup>**22**</sup> This is because the rich receive the bulk of public monetary transfers: 90 percent of cash transfers are received by the richest 40 percent of the population. The richest quintile receives 79.0 percent of the total, while the poorest quintile receives only 3.1 percent of the total. The second and third poorest quintiles receive 2.6 and 3.8 percent, respectively (Table 4).

35. **The concentration of monetary transfers among the rich is explained by sizeable and highly regressive pension transfers.** Close to all pension payments (97.4 percent) are received by the richest 40 percent of Colombians. Even within this group, there is a strong concentration in the top quintile, which receives 86.3 percent of pension transfers. Pension transfers have the effect of increasing the Gini coefficient by 1.63 percentage points. This contrasts strongly with the experience of other countries in the region, where pensions typically reduces income inequality.

> 21 This section draws upon the work of Nuñez (2009), which is the source of all statistics quoted in the section, unless otherwise mentioned.

> 22 According to Nuñez (2009) using 2008 ECV data.  Goñi et al (2011), using 2003 ECV data, concludes that monetary transfers do not have any impact on the Gini coefficient, as mentioned in Section 2.

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