1

United Nations Research Institute for Social Development

Financing Social and Labour Market Policies in Times of

Crisis and Beyond

Katja Hujo

23-24 June 2011UNDESA-ILO Expert Group Meeting, Geneva

The Challenges of Building Employment for a Sustainable Recovery

2

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

3

Financing Social Policy

Financing

Revenue sources Financingtechniques Expenditure policies

Taxation/contributionsAid/Loans

Remittances/OOPMineral Rents

private/publicfunded/PAYG

Direct/indirect tax

Social servicesSocial protection

Labour market policies

Resource mobilization

-Efficiency gains-Fund reallocation

4

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

5

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

6

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

7

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)

8

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 +

9

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.)

10

Social Expenditure: a Policy Variable

• Government expenditure on 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

11

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)

12

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

13

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.

14

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.

15

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)

16

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

17

Expenditure on LMP % GDP, Europe 2008 (Leschke and Watt 2011)

18

Share of Social Protection Components of Fiscal Stimulus Packages

19

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

20

Expenditure Public Works LA, 2009 Tuck, Schwartz and Andres 2009

21

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 coverageFunds insufficient

Arg, Chi, Bra, Mex, South Africa

Wage subsidies/work sharing, entrepreneurship incentivesTraining, LM services (ALMP)

General Revenues, Enterprises, Workers,ODA

CostlyState CapacityInstitutions

Arg, Chi, Mex

Public works, CCTs, social assistance (SP)

General revenues, ODA

CoverageFundingExit strategy?

Latin AmericaSouth AfricaIndia

22

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

23

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.

24

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!

Thank you!

www.unrisd.org