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 1
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 2
Financing Social Policy Financing Resource -Efficiency gains mobilization -Fund reallocation Financing Revenue sources Expenditure policies techniques private/public Taxation/contributions Social services Aid/Loans funded/PAYG Social protection Remittances/OOP 3 Direct/indirect tax Labour market policies Mineral Rents
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 4
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 5
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 6
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) 7
Tax Revenue as % of GDP per country group 35% • The aggregate 29.4% view: tax shares 30% in % of GDP rise 25% 23.2% 22.5% with income level 20% 18.3% 15% Source : Bird and Zolt (2005). 10% 5% 0% Low Middle High Total $5000 - $19999 $0 - $4999 $20000 + 8
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.) 9
Social Expenditure: a Policy Variable • Government expenditure Country In % of GDP on social protection (social insurance, social assistance) in three Argentina 9.2 middle income countries (2004) in LA Brazil 13.2 (2004) Mexico 3.5 (2002) Source Barrientos (2010) 10
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) 11
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 12
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. 13
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. 14
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) 15
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 16
Expenditure on LMP % GDP, Europe 2008 (Leschke and Watt 2011) 17
Share of Social Protection Components of Fiscal Stimulus Packages 18
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 19
Expenditure Public Works LA, 2009 Tuck, Schwartz and Andres 2009 20
Funding SP and LMP in times of crisis: examples from the South (based on Cazes et al. 2009) Policy Tool Financing Challenges Examples Contributions, Low coverage Arg, Chi, Bra, Unemployment benefits (PLMP) General Mex, South Funds insufficient Revenues Africa General Costly Arg, Chi, Mex Wage subsidies/work Revenues, State Capacity Enterprises, sharing, Institutions entrepreneurship Workers, incentives ODA Training, LM services (ALMP) Public works, General Coverage Latin America CCTs, social revenues, ODA Funding South Africa assistance (SP) Exit strategy? India 21
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 of social assistance (child grants, social pension) – Government revenues, national jobs fund 22
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 organizations 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. 23
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 of 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 on 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! 24
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