3 alternative sources of financing for social protection

When it comes to financing social protection programs, taxes are seen as a major resource.

This can be problematic in countries where tax evasion and tax avoidance by individuals and companies are rampant, such as the Philippines.

The former head of the country’s internal revenue bureau, Kim Henares, was outspoken when it came to calling out businessmen or celebrities found with tax discrepancies in their annual tax reports. Under her leadership, the bureau also launched several catchy advertisements meant to inform and encourage citizens to pay their dues to the government.

Many of its neighbors, such as Indonesia, India and Sri Lanka, are also struggling to broaden their tax base. In the Philippines, there is clamor for the government to bring down income tax rates, which come second highest to Vietnam among ASEAN member countries, but that would mean reduced revenues for a government heavily dependent on them.

This is why several experts during Asia-Pacific Social Protection Week, organized by the Asian Development Bank, argued for governments to “think outside the box” and look for alternative sources of financing independent from individual earnings to fund their social protection programs. The different elements that make up social protection — such as cushion against shocks and risks for the poor and the vulnerable and assistance for those without decent employment — would help countries achieve more sustained and inclusive development, according to Bart Édes, director of the ADB’s poverty reduction, gender and social development division.

Government assets and savings

Various participants at the event argued for thinking out of the box when it comes to unlocking other sources of finance for social protection. One resource is government assets, such as mining and land leasing, according to Mukul Asher, professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.

There are caveats however. Governments looking to raise revenues from the mining sector need to institute fair and transparent bidding processes for coal mines and avoid arbitrary allocations that stem from political connections. As with land leasing, meanwhile, governments can take advantage of owning large portions of land in their countries by renting them out, for example, for commercial or industrial purposes, he said.

Another way to generate revenue is through savings as a result of better expenditure management, be it in the procurement of goods and services or in careful evaluation of subsidies, such as fuel. The idea is that saving also increases a government's’ fiscal base, according to Asher.

“That integrated way of thinking about resources to finance government expenditure, including pensions, is what now would merit serious consideration,” he said.

The challenges

During the conference, consumption taxes became a point of interest given its reliance on people’s spending habits rather than on income. Wage-based taxes, studies have shown, could introduce negative disruptions in the labor market, as explained by Santiago Levy, vice president for sectors and knowledge at the Inter-American Development Bank.

But consumption taxes as an alternative source of financing for social protection programs can also be problematic, mainly because of its dependence on factors such as a country’s economic growth, stability and people’s consumption behavior, according to Miguel Nino-Zarazua, research fellow at the World Institute for Development Economics Research of the United Nations University.

“When you run a regression and you try to look at how economic growth performs, you see that developing countries have much more volatile economic growth, which is measured by the GDP, than developed countries,” he explained.

During a crisis, revenues from consumption taxes — otherwise known as value-added tax on goods and services — can be “twice as volatile as GDP in developing countries,” he added.

That doesn’t address yet the institutional and administrative capacities required at the national and local level to ensure the tax is used efficiently.

Nino-Zarazua also expressed concerns on using a country’s natural resources as a means to raise revenues. Politicians could use the opportunity to delay imposing higher income taxes to the wealthy, and if they use it for social spending, manipulate it for their own political gains, an issue that has been associated with a number of conditional cash transfer programs.

“In Latin America, part of my work also shows that natural resources have been positive in increasing spending on social protection, but it has also changed the behavior of politicians, so [it depends] on the country,” he said.

Not all is as negative as it sounds. In Bolivia, for example, a change in the terms of the government’s contracts with oil and gas companies on hydrocarbons exploration and production when President Evo Morales took office as head of state a decade ago opened up revenues for the government, a portion of which was spent on social programs, such as pensions for the elderly with low income. Public spending on these sectors, including health and other programs aimed at poverty alleviation, grew 45 percent between 2005 and 2012, according to documents published by the Bolivian Ministry of Economy and Public Finance.

The role of aid

The role of official development assistance had limited spotlight during the conference, and the emphasis was more on domestic resources as the main financing mechanism for governments’ social protection programs.

But there is perhaps another dimension. As social protection comes across as an overarching umbrella covering a multitude of policy areas, including education and health, it is difficult to assess how much donors are actually spending under it. Donors also often have their own definitions and approaches when calculating expenditure on social protection programs.

This is one of the many constraints the Organization for Economic Cooperation and Development encountered in trying to analyze the evolution of ODA for social protection from 2008 to 2011. In addition, some bilateral donors channel their support for social protection programs through unearmarked contributions to multilateral institutions such as the International Labor Organization.

When it is earmarked and channeled to country channels, meanwhile, it’s often bundled under a financial package for a given sector, for example a child-feeding program under a sectoral budget support for basic education, according to a report by the OECD in September 2015.

This presents difficulties in understanding how big or small the role of aid is in social protection programs. Donors also channel their aid through different partners: some through nongovernmental organizations, U.N. agencies and private firms; some through their own implementing agencies, as is the case with Germany, which channels its support through the Deutsche Gesellschaft für Zusammenarbeit or GIZ and KfW, the German government’s development bank; and some through national governments and local authorities in the form of general budget support or sector specific support.

Some trends do emerge. Based on the responses of eight OECD-DAC member countries to an OECD survey which formed the basis for much of the report, it appears that large donors like the United Kingdom and the European Union are more likely to channel their support through national programs, while donors with smaller ODA such as Austria and Finland channel their support through U.N. agencies and NGOs.

Donors are also more likely to channel a bigger portion of their support to least developed countries, with the exception of Australia, whose aid for social protection is bigger for lower-middle-income countries at 73 percent than for least developed countries  at 27 percent.

Proponents of social protection are likely to welcome this focus, as least developed countries often have a smaller fiscal base from which to generate revenues for social protection programs.

“Aid is an important source for countries that are at the very low stage of development. Foreign aid can be an important source to reduce the fixed cost of introducing programs, because there is always a fixed cost,” U.N. University’s Nino-Zarazua said.

Seven of the eight donors in the survey also see developing national policies and building governments’ institutional capacities as a continuous priority for the next few years, which indicates a “desire” by donors to move away from pilot schemes and creating parallel systems that bypass existing government structures, according to the OECD report.

This is one of the areas the EU is currently actively involved in sub-Saharan Africa and Latin America. In Zanzibar for example, as part of the EU’s technical assistance program for social protection or SOCIEUX, Michel Rovers, director of strategy, policy and research at the Dutch Institute for Employee Benefit Schemes, and another expert from Barbados helped the government in identifying ways in efficiently scaling up a pension scheme that it aims to roll out nationwide. One of the areas the Zanzibar government asked them help on was in identifying methods of payment other than cash handouts, Rovers said.

Such approach would help remove some of the problems that Nino-Zarazua often finds with donor pilots.

“I definitely think pilots are very problematic, because they usually stay for a certain period of time ... so unless there is good conversation, the probability of these pilots to complete after the funding has ended are very high,” he explained.

To have a full picture of how donors are spending on social protection however, both OECD and donors would have to make adjustments on how they report and track aid spending. Suggestions in the report include explicitly providing a code for social protection in the OECD Creditor Reporting System; providing a social protection marker, like what the OECD does in tracking aid for gender and climate change; and for donors to include terms such as “cash transfer,” “pension” and “insurance,” for example, in its project descriptions to make it easier for the OECD and other data lookers to search for keywords related to social protection.

Donors would have to work together to agree on the descriptions or keywords to use to standardize their reporting to the OECD. Implementing changes to the current CRS codes or adding a social protection marker meanwhile would require the consensus of all OECD-DAC members.

Read more international development news online, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you FREE every business day.