Financing Social and Labour Market Policies in Times of Crisis and - - PowerPoint PPT Presentation

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United Nations Research Institute for Social Development

Financing Social and Labour Market Policies in Times of Crisis and Beyond

Katja Hujo

23-24 June 2011 UNDESA-ILO Expert Group Meeting, Geneva The Challenges of Building Employment for a Sustainable Recovery

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Overview

• Financing SP and LMP: Introduction
• Fiscal Space and Affordability
• Mobilizing Revenues (ex.): Taxation, Mineral

Rents

• Financing SP in Times of Crisis: Country

Examples

• Policy Implications

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Financing Social Policy

Financing Revenue sources Financing techniques Expenditure policies

Taxation/contributions Aid/Loans Remittances/OOP Mineral Rents

private/public funded/PAYG Direct/indirect tax Social services Social protection Labour market policies

Resource mobilization

• Efficiency gains
• Fund reallocation

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The Challenge…

• …is to build social policies on

financial arrangements that are sustainable in fiscal and political terms, equitable/progressive and conducive to economic development

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The Context: Globalization

• Globalization has put pressure on states’ capacity to

raise revenues:

– Liberalization of markets – Income and asset concentration – Labour market problems – External debt and global imbalances – Global economic and financial crisis

• Demand for social policy has increased:

– Volatility of market processes, economic and financial crises – Unemployment, informality, poverty (working poor) – Demographic change – HIV/AIDS pandemic and natural disasters

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The Impact of the Crisis on financing SP

• Foreign capital and domestic credit

– Financing costs (internal/external)

• Trade and FDI

– tax revenues

• Commodity prices and Terms of Trade

– tax revenues

• Remittances

Household income 

• Social expenditures , subsidies 

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Fiscal Space

• Budgetary room to finance public policies in a

sustainable way (honour debt obligations, solvency)

• Opening fiscal space:

– Reallocation of existing revenues/efficiency gains – Mobilization of additional revenues

• Estimating fiscal space:

– Compare actual expenditure with benchmarks – Compare actual expenditure with costs of basic package (SPF) – Assess space to increase tax revenues or public borrowing (Oxfam Report, IMF)

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Tax Revenue as % of GDP per country group

• The aggregate

view: tax shares in % of GDP rise with income level

Source: Bird and Zolt (2005).

18.3% 22.5% 29.4% 23.2% 0% 5% 10% 15% 20% 25% 30% 35% Low Middle High Total $0 - $4999 $5000 - $19999 $20000 +

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Is Social Policy affordable?

• Social policy is an investment in people’s well-

being and development

• Type of interventions and programmes as well

as costs depend on policy legacies and structural factors, political priorities, and contemporary needs

• Basic social protection packages are affordable,

also for low-income countries (ILO costing studies, Desa simulation on MDG financing for LA, Unicef/Helpage costing tools etc.)

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Social Expenditure: a Policy Variable

• Government expenditure
• n social protection

(social insurance, social assistance) in three middle income countries in LA

Source Barrientos (2010)

Country In % of GDP Argentina (2004) 9.2 Brazil (2004) 13.2 Mexico (2002) 3.5

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Mobilizing Revenues

• Tax reform
• Extension of contributory systems (social

insurance)

• Capture of mineral rents
• Foreign Aid
• Domestic and external borrowing
• Public-private partnerships
• Private funds (HH income/S, including

remittances)

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Reform of Taxation

• Tax reform remains a key challenge for

developing countries. Taxation

– Is superior to other revenues in terms of distributional justice and to reach universal coverage

• Direct taxes greater potential in terms of

progressivity/solidarity

• indirect taxes (VAT): design matters
• trade taxes

– Can enhance strong state-society relations and state accountability (all contribute, all benefit) – Is more sustainable than external revenues

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Revenue type, distribution and social relations

Regressivity Solidarity

• Time-burden tax (self-provision)
• User fees (most regressive, least solidaristic)
• Pre-paid schemes
• Generalized insurance
• Indirect taxes
• Earmarked taxes
• Direct taxes (most progressive, most solidaristic)

Source: Delamonica and Mehrotra 2009.

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Political economy of taxation

• More convincing to argue for progressive direct

taxation if public/social expenditures benefit all (universalism)

• To overcome obstacles towards direct taxation,

find functional equivalents:

– Marketing boards – Land/export taxation etc.

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Mineral rents and financing SP

• Can mineral rents ease the financing constraint?
• Challenges:

– Dutch disease effects and volatility – State capacity and democratic governance – Build a social consensus on the use of funds:

• Norway: Government Pension Fund Global
• Bolivia: Renta Dignidad financed through Direct

Hydrocarbons Tax (32% production tax 2005)

• Chile: Extension of Social Pension Coverage (2008)

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Financing of LMP and SP in crisis context

• Estimating total costs:

– Spending on existing programmes (automatic stabilizers): labour market policies, social protection – Spending on stimulus measures dedicated to social protection or employment protection/creation – Private spending (households, communities, NGOs, corporate sector): how to measure increase of unpaid work, depletion of savings, assets etc.

• Challenges:

– Data problems with social protection/LMP spending in many developing countries – Data on revenue/funding sources scarce

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Expenditure on LMP % GDP, Europe 2008

(Leschke and Watt 2011)

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Share of Social Protection Components

• f Fiscal Stimulus Packages

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CCTs in Latin America: Coverage and Costs

• A. Coverage, 2000-2010 (% of total population) Blue
• B. Expenditure, 2000-2009 (in % of GDP) Orange

CEPAL 2010 Panorama Social

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Expenditure Public Works LA, 2009

Tuck, Schwartz and Andres 2009

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Funding SP and LMP in times of crisis: examples from the South (based on Cazes et al. 2009)

Policy Tool Financing Challenges Examples Unemployment benefits (PLMP) Contributions, General Revenues Low coverage Funds insufficient Arg, Chi, Bra, Mex, South Africa Wage subsidies/work sharing, entrepreneurship incentives Training, LM services (ALMP) General Revenues, Enterprises, Workers, ODA Costly State Capacity Institutions Arg, Chi, Mex Public works, CCTs, social assistance (SP) General revenues, ODA Coverage Funding Exit strategy? Latin America South Africa India

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Policy examples

• Argentina: LM services, training, subsidized reduction

working hours, incentives formalization, wage increases, job creation (public works), non-contributory transfers (children, elderly) and programmes for unemployed

– Funding: government revenues (pension funds, export tax), WB loan

• Brazil: minimum wage adjustment, extension UB, extension

Bolsa Familia, housing

– Funding: General revenues, debt, Workers Protection Fund (FAT)

• South Africa: public investment programme, expanded

public works programme, training layoff scheme, expansion

• f social assistance (child grants, social pension)

– Government revenues, national jobs fund

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A strategic approach towards the financing of social policy requires

• Reliable calculations on estimated costs of planned

programmes over longer periods and taking into account different scenarios[1]

• Evaluation of different funding sources and financing

techniques and their pros and cons from a political, economic and social point of view

• Analysis of relevant experiences in other countries
• Early dialogue with relevant stakeholders, including

Social and Finance Ministries, external donors, international organizations, social partners, civil society

• rganizations etc.
• Contingency plan for crisis situation
• [1] This has been done by the ILO with regard to the Social Protection Floor;

Helpage International has done several studies on cost estimates for social pensions.

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Conclusions

• Financing mix is country specific, what is a (national, global)

political priority is affordable

• Anchor a country’s social policy system with domestic sources
• f finance (synergies between economic and social

development)

• External resources (mineral rents, aid, remittances) have the

potential to complement these, especially in low-income countries

• Successful transformation of resources into outcomes depends
• n design of social programmes (e.g. universalisms vs.

targeting), broader strategy, politics and governance

• Avoid reforms that trigger long term costs for social

development

• Fiscal constraints are no excuse to violate social rights!

Thank you!

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