CHAPTER Financing Social Policy 8 Previous chapters in Section two of the report have pro- Such funds can be raised from a variety of sources: inter- vided substantial evidence of the positive economic and nally via taxation and social insurance schemes, externally social impact of expenditures on basic social services and in the form of aid or, in the case of mineral-rich countries, social protection programmes. Although the value of such by taking advantage of favourable commodity prices and social policies in reducing poverty and inequality is recog- channelling rents into social programmes. Social protection nized, concern over their affordability remains widespread. and social services can also be fi nanced privately through household income, including transfers from migrant work- As fi scal constraints and the costs of health and elder care ers, and unpaid work. Obviously such public and private grow, even mature welfare states have come under pressure sources lead to signifi cant differences in terms of outcomes. in recent decades, leading to predictions of their imminent This chapter analyses the contrasting effects of different demise. For the most part, however, such states have man- fi nancing sources and instruments on social development, aged to adjust their social systems to these pressures. Most equality and poverty outcomes. developing countries, on the other hand, operate within more severe fi scal constraints. Moreover, globalization and The availability of resources to fi nance social policies accompanying neoliberal policy prescriptions have had a depends on a country’s economic performance, including negative impact on public revenues, forcing governments its capacity to produce income and savings and to generate to reduce expenditures, curtailing social spending severely. government revenues; the performance of its domestic capi- These trends have had a particularly strong impact on low- tal markets; and the availability of external funding such as income and aid-dependent countries. foreign investment, loans or grants. A dynamic economic environment and a stable world economy are therefore key determinants of national public fi nances, and it is here that A clear case can be made for the global economic crisis has had severe consequences for increasing investments in social developing countries. Many are faced with sharply declin- ing private and public revenues and falling growth rates due protection and social services in order to a decrease in foreign capital infl ows, domestic credit and to make meaningful dents in the remittances, falling commodity prices and worsening terms multiple manifestations of poverty of trade. Mobilizing additional resources or even maintain- ing existing levels in such a context is a major challenge. Nonetheless, in response to the crisis, many countries are In light of the positive development synergies explained making efforts to implement social protection programmes in previous chapters, a clear case can be made for increas- alongside fi scal stimulus packages. Meanwhile, the inter- ing investments in social protection and social services in national donor community has made commitments to order to make meaningful dents in the multiple manifesta- increase development assistance. tions of poverty. The United Nations Millennium Project recognized this in calling on most developing countries to Mobilizing resources is, however, only part of the bat- mobilize up to an additional 4 per cent of their gross domes- tle. Decisions about revenue policies and the alloca- tic product (GDP) to promote poverty reduction.1 tion of public funds are the result of political processes, 207 COMBATING POVERTY AND INEQUALITY often dominated by elite groups. Consequently, such poli- Section 2 focuses on the links between different revenue cies may not lead to the best outcomes in terms of pro- sources and fi nancing instruments and the various dimen- viding public goods and reducing poverty (see chapter 11). sions of social policy – redistribution, reproduction, pro- Furthermore, institutional capacity, including the quality duction and protection. and effi ciency of public administration and service provid- ers, infl uences how successfully resources are translated into Section 3 analyses the impact of selected revenue sources social outcomes (see chapter 10). on development outcomes and equality across various social policy regimes and development contexts. It com- pares domestic resources such as taxation, social insurance contributions and pension funds with sources such as min- Mobilizing resources is only part of the eral rents, aid and remittances. battle: decisions about revenue policies Section 4 highlights policy lessons and remaining chal- and the allocation of public funds lenges, particularly with regard to the political economy of are the result of political processes, fi nancing social policy. often dominated by elite groups 1. Spending on Social Policy The analysis in this chapter points to four main conclusions. • To signifi cantly reduce poverty, more funds have to be invested in universal social policies, especially in low- Social spending refl ects both national income countries. incomes and policy choices • Domestic fi nancing instruments such as taxation and social insurance can create synergies between economic In general, public social expenditure as a share of and social development and strengthen democracy and GDP rises with income, with high-income countries in solidarity within states. the North spending the most. However, countries with • Other fi nancing sources, such as aid, remittances a comparable income level display signifi cantly differ- and mineral rents, can play an important role in ent levels of expenditure on social protection and social complementing domestic resources. This is especially services.2 Within member countries of the Organisation true in low-income countries characterized by high for Economic Co-operation and Development (OECD), degrees of informality, low tax revenues and low for example, Sweden spends as much as 30 per cent of coverage of social insurance schemes. GDP on cash benefi ts and social services, whereas the • The ultimate challenge is to build social programmes United States and Ireland spend only half that amount on fi nancial arrangements that are themselves (around 16 per cent). Middle-income countries such as sustainable in fi scal and political terms, equitable and Mexico and the Republic of Korea spend between 6 and conducive to economic development. 7 per cent – lower than their respective regional averages of 12.7 per cent for Latin America and 8.4 per cent for Section 1 of the chapter describes how social expenditures emerging economies in Asia.3 Within the same region, and public fi nances vary according to income level and Brazil and Mexico, both middle-income countries, spend policy regime, how they have been affected by globali- 13.2 and 3.5 per cent, respectively, of GDP on social pro- zation and why social policies are affordable even for tection. Mongolia spends 10.5 per cent versus 1.9 per cent low-income countries. in Indonesia (see table 8.1). 208 SECTION TWO – CHAPTER 8 – FINANCING SOCIAL POLICY TABLE 8.1: Government expenditure on social protection, social insurance and social assistance (% of GDP) Country Year Social protection Social insurance Social assistance Argentina 2004 9.2 7.7 1.5 Brazil 2004 13.2 11.7 1.4 Mexico 2002 3.5 2.6 1.0 Guatemala 2000 1.8 0.7 1.1 Viet Nam early 2000s 3.5 1.9 0.5 Mongolia early 2000s 10.5 7.8 1.1 Indonesia early 2000s 1.9 1.3 0.3 Note: Social protection expenditure includes public expenditure on social insurance and social assistance, as well as other programmes, such as housing, munici- pal and community services. Source: Barrientos 2010. The amount of public resources channelled into social sector policies is determined by the availability of The amount of resources invested funds and policy priorities, but administrative effective- in social policy – and how they are ness also plays a role. As the case studies throughout this report show, the size of government spending is also spent – is largely determined by a determined by the division of labour between the state, country’s policy regime markets and households in providing social services, which, in turn, is strongly infl uenced by a country’s policy regime. The global context infl uences the As discussed previously in this report, the amount of social fi nancing of social policy expenditure does not reveal how much of this money actually reaches lower income groups or how effective Following the debt crises in the early 1980s, many devel- these expenditures are in reducing poverty or increasing oping countries, particularly in Latin America and sub- equality (see chapters 5 and 6). Nonetheless, a compari- Saharan Africa, were forced to undertake signifi cant fi scal son of the shares of public social expenditure in domes- adjustments. The radical rethinking of the role of the state tic income demonstrates two important points: fi rst, that and fi scal expenditures during this phase of neoliberal social expenditure is clearly a policy variable and, second, reform undermined the interventionist policies of develop- that the amount of resources invested in social policy (and, mental states, leading to the withdrawal of the state from most importantly, how they are spent) is determined largely many policy areas and the retention of only a residual role by the policy regime in a country, rather than its income in social provisioning. This paradigm shift led to the sub- level. High-expenditure levels in former socialist countries, stantial privatization of social programmes, public sector such as Mongolia, and in welfare state pioneers in Latin retrenchment and considerable decreases in social expen- America, such as Argentina and Brazil, illustrate this point ditures. The reforms had differing effects on public budgets: (see table 8.1). in some cases the privatization of public enterprises led to 209 COMBATING POVERTY AND INEQUALITY transitory infl ows of capital, whereas in the case of pension to protect the vulnerable and the poor.