11.2. Structure of general government expenditures by economic transaction

Public spending can be categorised based on economic transactions such as employee compensation, intermediate consumption, subsidies, property income (including interest), social benefits, grants and investment. This approach differs from categorising government spending by function, which groups expenditures by thematic categories (e.g. health, education or defence). It focuses instead on transactions that are cross cutting across government activities. Examining government spending by economic transaction allows a deeper insight on government spending patterns and their impact on the economy.

In 2021, social benefits and employee compensation together accounted for 60.6% of general government expenditure in the Latin American and Caribbean (LAC) region and 61.4% among OECD countries. The largest category in the region is social benefits (e.g. pensions or conditional cash transfers), accounting for 34.8% of government expenditure, an increase of 1.5 percentage points (p.p.) since 2019. OECD countries spent a greater share on social benefits in 2021 (41.4%, a 0.8 p.p. increase from 2019). Employee compensation is the second largest economic transaction in both LAC and OECD countries, making up a larger share of government expenditure in LAC countries (25.8%) than in OECD countries (20%). This share has decreased by 1.6 p.p. since 2019 in LAC countries and by 2.3 p.p. in OECD countries (Table ‎11.1).

Public spending patterns vary widely across LAC countries. For instance, 43.5% of Guatemala’s total government expenditure was on employee compensation in 2021, the highest amongst LAC countries, while for Colombia it was only 17.9%. Chile spent the highest share on social benefits (49%), compared to only 7.1% for El Salvador. These disparities highlight the different structures of general government expenditures by economic transaction in the region (Table ‎11.1).

In LAC countries, property income accounted for 12.9% of expenditures in 2021, double the average share in OECD countries (5.1%). In contrast, OECD countries spent more on public investment in 2021 (7.4% on average) than LAC countries (4.8%). In 2021, subsidies made up 1.3% of expenditures in the LAC region, a slight increase from the 0.9% in 2019, while OECD countries greatly expanded their expenditure of subsidies from 2.2% in 2019 to 4.5% in 2022 (Table ‎11.1). This comparatively sharp rise in spending on subsidies could stem from differences in industrial policies, with OECD countries placing greater emphasis on government intervention to encourage investment in certain key sectors.

Relative to gross domestic product (GDP), government expenditures on social benefits amounted to an average of 13.3% of GDP in LAC countries in 2021, less than in OECD countries (19.1%). Guatemala (1.8%) and Peru (2%) spent the smallest share of GDP on social benefits among LAC countries. Employee compensation amounted to 9.8% of GDP among LAC countries on average, similar to that of OECD countries (9.3%). Government spending on investments is substantially lower in LAC countries (1.8% of GDP) than the OECD average (3.4%). However, Peru (4.2%), El Salvador (3.8%) and Paraguay (3.6%) spent the most on investment relative to GDP in the region, above the OECD average (Figure ‎11.4).

Data are from the IMF Government Finance Statistics (IMF GFS) database, which applies the concepts set out in the Government Finance Statistics Manual (GFSM). The GFSM provides a comprehensive conceptual and accounting framework suitable for analysing and evaluating fiscal policy. It is harmonised with the other macroeconomic statistical frameworks, such as the System of National Accounts (SNA).

Expenditures encompass intermediate consumption, employee compensation, subsidies, property income (including interest spending), social benefits (consisting of social benefits other than social transfers in kind and of social transfers in kind provided to households via market producers), grants and other expenses (mainly current and capital transfers but also other minor expenditures as other taxes on production, current taxes on income and wealth etc., and adjustments for changes in pension entitlements), and investments. All these transactions at the general government level are recorded on a consolidated basis (i.e. transactions between levels of government are netted out). For the OECD average, data are derived from the OECD National Accounts Statistics database, which is based on the SNA framework.

Further reading

OECD (2023), Economic Policy Reforms 2023: Going for Growth, OECD Publishing, Paris, https://doi.org/10.1787/9953de23-en.

Pessino, C., A. Izquierdo and G. Vuletin (2018), Better Spending for Better Lives: How Latin America and the Caribbean Can Do More with Less, Inter-American Development Bank, Washington, DC, https://publications.iadb.org/en/publication/better-spending-better-lives.

Data for Mexico, Paraguay and Peru are recorded on a cash basis.

Data for Costa Rica and Mexico are not included in the LAC average.

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