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Nº 838 -
www.lyd.org- Email:[email protected]
September 21, 2007
ISSN 0717-1528
What is the Best Way to Spend Surplus
Government Revenue for the Common
Good?
It has become common practice to blame
Both of these calculations disprove the
the private sector, and private companies in
premise stated at the beginning of this article
particular, for a series of problems and defiand help to focus the discussion on the addiciencies that afflict our society. The latest actional revenue captured by the Government, its
cusation comes in the midst of
potential uses and the role of
the debate about the ethical salthe private sector in this exary and again points the finger at
penditure.
This
is
the
time
for
Chile
to
companies for supposedly abinvest in improving its
sorbing most of the revenue
How should these
productivity
and increasing its
generated in Chile as a result of
resources be used?
competitiveness, which are
the high price of copper, to the
directly related to the level of
detriment of workers.
flexibility in the labor market. Given the situation described
above, we are left to discuss
In this context, the
But the facts and figures
tell another tale. From late 2003 Government’s duty is to foster how to best spend the surplus
funds. The fact that the Govthe creation of employment
to June 2007, real national income available (in 2003 US$) through measures that aim to ernment has more money is
enhance labor market
not a problem; rather, it is crurose by $17.5 Billion (32%), from
flexibility
and
to
avoid
any
cial to ensure that these funds
$48.5 to $64.2 Billion. Who has
measures
that
threaten
to
are used efficiently and in acreally captured these resrouces?
distort
the
process
through
cordance with current macroAccording to calculations by the
1
which
resources
are
allocated.
economic conditions. On the
economist Salvador Valdés,
one hand a disproportional
through their work private indirise in public spending could
viduals captured 28% of this adcause a rise in inflation and
ditional revenue, the Governthe
exchange
rate;
as such, the first priority in
ment 60% ($9.4 Billion) and private companies
using
these
resources
is to maintain the macthe rest—$1.9 Billion or 12% of the additional
roeconomic equilibrium. However, this in itself
revenue.
is not enough. It is necessary to control the
Other more recent estimates2 show that
quality, and not just the quantity, of public
favorable export prices for the 2003 – 2007 pespending, making sure that any expenditures
riod generated additional revenues of US$ 90
made provide efficient solutions to the counBillion, 35% of which was captured by the
try’s problems.
Government.
Attempting to influence the decisions
about how to spend the surplus that will be
En esta edición:


¿Cómo Gastar los Mayores Recursos del Estado en
Beneficio de Todos?
Proyecto de Donaciones: Fortaleciendo la Sociedad Civil
1
ciency of private expenditure. This
is the rationale for changes in the
taxation structure that provide incentives for investment, as these
open up new jobs that the country
needs to improve the condition of
its poorest inhabitants.
Graph 1
CASEN 2006: Work Income
from head of household as a percentage of total
household income, by income deciles.
90.00
80.00
70.00
The same thing occurs with the
regulation of labor markets. As the
private sector generates the most
jobs, the government must collaborate with it and not inhibit hiring.
60.00
50.00
40.00
30.00
20.00
The Role of the
Private Sector
10.00
0.00
Average
1
2
3
4
5
6
7
8
9
10
The central role of the private sector is to generate productive employment. The jobs created and the
income derived from them are central to the
struggle against poverty and the country’s development.
Source: LyD using data from CASEN 2006
available in Chile as a result of new external
conditions, a year ago a group of 20 economists proposed three areas for advancement:
improving the quality of education, encouraging
investment through tax cuts, and modernizing
the government. Considering the nature of
Chile’s economy, the central idea behind all
three areas is to increase the country’s competitiveness. Thus, the priorities must be focused on improving education and generating
employment.
According to the CASEN 2006 Survey
(Graph 1) the income from the main occupation
of the head of the household (in paid employment) makes the largest contribution to total
family income,3 amounting to 77% in the first
decile and 59% among all households, on average. This means that the main source of income in Chilean homes, and especially in the
poorest households, is the salary earned by
the head of the household.
Furthermore, beyond specific measures
that the authorities decide to put into practice, it
is crucial to have a more modern State that is
more efficient and less bureaucratic, in
order to ensure that any money spent
Table 1
avoids wasted resources from lengthy,
Sources of Growth in Per Capita Income 2000 – 2006,
poorly planned processes. This is esFive Lowest Deciles
pecially important with increases in edDecil
Salaries
Subsidies Remaining %
Total
ucational spending, as it is well known
1
58.5
14.7
26.8
100.0
that in recent years there have been
2
71.2
6.0
22.8
100.0
major increases in resources chan3
55.1
5.8
39.1
100.0
4
45.7
3.7
50.6
100.0
neled to this sector without having pro5
52.1
0.5
47.4
100.0
duced better student outcomes.
Promedio
56.5
6.1
In addition to being efficient in its
own spending, through regulation the Source: Larrañaga and Herrera, 2006
Government also influences the effi-
2
37.4
100.0
This is supported by Castro and Cheyre
(2006),4 who found that one of the main events
associated with a family’s falling into or overcoming poverty is the employment situation of
the head of the household.
This is the time for Chile to invest in improving its productivity and increasing its competitiveness, which are directly related to the
level of flexibility in the labor market. In this
context, the Government’s duty is to foster the
creation of employment through measures that
aim to enhance labor market flexibility and to
avoid any measures that threaten to distort the
process through which resources are allocated.
Another recent study by Larrañaga and
Herrera5 (Table 1) found that 56.5% of the
growth in per capita income of Chilean households from 2000 to 2006 was
due to a rise in salaries. This
figure stands at 58.5% in the
A rigid, bureaucratic and
first decile, 71.2% in the secever larger government will
ond and 55% in the third.
only serve to slow the
It is also necessary to have tax
structures that encourage investment, which will be the motor that generates new employment to lift people out of poverty.
country’s development and
Improving the well being
Lastly, in relation to the Govof Chileans, therefore, will be favor some to the detriment of ernment’s own spending, modaccomplished through policies others, without using criteria ernization is necessary to enthat seek greater flexibility in based on equity or efficiency. sure that large scale spending
labor markets and allow rehas a real impact on the well
sources to be allocated withbeing of the populace, which is
out distortion. The private secevident in the case of education 
tor can make a substantial contribution to improving the situation of the most marginalized
1 Diario El Mercurio, Sunday, September 2, 2007.
segment of the population, but only if it is al2 Alejandro Fernández, President of Gemines, in
lowed to do so.
Diario La Tercera, Sunday, September 16th.
3 MIDEPLAN defines household monetary income
as the sum of monetary subsidies received plus idependent income from salaries and wages, earnings from independent work, including self-sufficiency and the value of
agricultural products consumed in the household, as well
as income from properties, interest, bonuses and gratuities and retirement benefits, pensions and transfers between private parties.
4 Castro, Rodrigo and Cristóbal Cheyre (2006).
“Midiendo la movilidad de ingresos y la dinámica de la
pobreza en Chile,” Serie Informe Social Nº 103, November 2006.
5 Larrañaga, Osvaldo and Rodrigo Herrera 2006:
“La Reducción de la pobreza entre 1990 y 2006.”
Conclusion
The most important consideration in the
context of the expected abundance of resources is to administer them in the most efficient manner possible and in accordance with
the macroeconomic framework. A rigid, bureaucratic and ever larger government will only
serve to slow the country’s development and
favor some to the detriment of others, without
using criteria based on equity or efficiency.
3