# **I. Introduction**

Uruguay is an upper-middle income country with a population of 3.45 million located in the Southern Cone of South America. Based largely on agricultural and service exports and a strong internal market, it has a resilient economy that was able to weather the latest global downturn of 2008/09 better than any other country in the region. The Government of Uruguay (GoU) has in recent years put efforts into building a strong social compact that provides support to the most vulnerable populations. In fact, the poverty rate has declined from 32.5 in 2006 to 8.1 in 2018. Meanwhile, inequality also decreased in the period: the Gini coefficient went down from 0.455 to 0.38.<sup>1</sup> The evolution of the well-being indicators is certainly related to the GoU’s targeted fiscal policies with a redistributive component. In 2009, Uruguay’s fiscal policies were shown to achieve a nontrivial reduction in inequality and poverty (Bucheli et al 2012). Direct taxes were found to be progressive, as was social spending on direct transfers, contributory pensions, education and health.<sup>2</sup> These effects more than compensated the regressive nature of indirect taxes.

The following years saw a continuation of those policies, as well as the expansion of some of the flagship programs. For instance, in 2017, the personal income tax rate before deductions in the highest income bracket was 36 percent, while in 2009, the highest rate was 25 percent.<sup>3</sup> Social spending has also increased. In 2009, health and education expenditures accounted for 4.6 and 3.6 percentage points as a share of the GDP, respectively. The corresponding shares in 2017 were 6.41 and 3.78.

This study has two main objectives. First, it provides an update of the main fiscal policies that are in place in Uruguay as of 2017 and documents their impacts on households’ welfare and its distribution. Second, it presents a comparison – to the extent possible – with previous estimates. Given the upcoming electoral season, it is a timely topic to study as these findings can provide further evidence to the design of the interventions the government should consider expanding of reviewing, whenever the focus is to reduce poverty or inequality.

The analysis presented here follows a broadly used methodology called Commitment to Equity (CEQ)<sup>4</sup> that has been applied in a wide variety of contexts for both developed and developing countries. In short, the method consists on studying the changes in the value of well-being indicators under two scenarios: one which assigns households an income that would be available in the complete absence of fiscal interventions, while a second scenario assigns households an income after the government’s fiscal policies have been applied such that all taxes have been paid and all benefits have been received. These scenarios are constructed following an accounting

> 1 Instituto Nacional de Estadística (INE) http://www.ine.gub.uy/linea-de-pobreza [accessed on June 27th 2019].

> 2 The exception was expenditure on tertiary education.

> 3 Source: BPS https://www.bps.gub.uy/bps/file/12071/2/2017---comunicado-04-r----valores-escalas-irpf- <u>2017.pdf and https://www.bps.gub.uy/bps/file/15651/1/valores_escalas_a_partir_de_01_2009._vers.1.pdf</u> [accessed on July 2<sup>nd</sup> , 2019].

> 4 Lustig (2018).

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