Why Brazil’s State Spending Increases Income Inequality

🔍 How contributions to inequality were measured (POF 2008–09)

A factor decomposition of the Gini coefficient is used to quantify how direct monetary income flows to and from the Brazilian State add to family per capita income inequality. The analysis relies on household-level data from the Brazilian POF 2008–09 and isolates only direct cash flows between households and the State.

Included income flows:

• Public sector workers' earnings
• Social Security pensions
• Unemployment benefits
• Social Assistance transfers
• Direct taxes and employees' social security contributions (flows to the State)

Excluded from measurement:

• Indirect effects such as subsidies to and taxation of companies
• In-kind provision of goods and services

📊 Main findings: public pay and pensions widen inequality

The State accounts for a large share of measured family per capita income inequality. Key results include:

• Incomes tied to public-sector work (wages and pensions) are highly concentrated and have a regressive effect on the income distribution.
• Private-sector income components are also concentrated but operate in a progressive direction.
• Overall, public spending associated with employment and social policies is concentrated among an elite group of workers and, when aggregated, tends to increase income inequality.
• Redistributive mechanisms—direct taxes and social assistance—are strongly progressive but quantitatively small, so their redistributive impact is completely offset by the regressive income flows from the State.

✨ Why it matters

These findings contrast with evidence from many European countries where public transfers and taxation typically reduce inequality. In Brazil, direct monetary transfers and public-sector remuneration as measured here contribute to higher measured inequality because progressive instruments are too limited in scale to counterbalance regressive State-related income flows.