International Labour Organisation (ILO) argues that the poorest countries can afford to finance social protection, and there are eight options to create fiscal space. In an analytical paper, ‘Fiscal Space for Social Protection: Options to Expand Social Investments in 187 Countries’, Isabel Ortiz, Director of the Social Protection Department, identified eight options. Here are the summary of their main message and some of my comments.
Re-allocating public expenditures aims to replace high-cost, low-impact investments with more cost-effective projects. In order to analyse cost-effectiveness to determine which projects are better, existing pilot programmes should have good data and impact evaluations in their project design. Implementing rigorous evaluations is always a challenge. Pilot projects are often driven by different development partners and donors, and they do not necessarily put emphasise the importance of rigorous impact evaluation.
Increasing tax revenues can be done by altering different types of tax rates (regressive/progressive for different goods and services) or strengthening the efficiency of tax collection methods.
Expanding social security coverage and contributory revenues finance social protection and free fiscal space. Taking balance between contributory and non-contributory schemes may be a key particularly for middle-income countries which have relatively more people in formal economy. The discussion point might be from when contributory schemes should be mainstreamed.
Lobbying for aid and transfers requires either engaging with different donors and development partners. It is true that a large proportion of social protection programmes are financed by donors and implemented by international organisations. However, I believe that sustaining social protection programmes requires government’s ownership of developing countries. It may define the sustainability of social protection how early recipient countries can become financially independent to operate its social protection system.
Eliminating illicit financial flows creates additional fiscal space.
Using fiscal and central bank foreign exchange including sovereign wealth funds can be used for domestic and regional development and social investments. This is where strong political will is needed.
Borrowing or restructuring existing debt involves active exploration of domestic and foreign borrowing options at low cost. More than 60 countries have successfully renegotiated debts, directing debt servicing savings to social programmes. The key challenge would be whether lenders put values on social protection, investing in people. Unlike infrastructure development, social programmes do not result in immediate economic returns. It may let lenders hesitate to renegotiate debts for promoting social programmes.
Adopting a more accommodating macroeconomic framework entails allowing for higher budget deficit paths.