Discussion Paper "Sustainably Financing Social Protection Floors"

Discussion paper "Sustainably Financing Social Protection Floors" Toward a Permanent Role in National Development Planning and Taxation by Barry Herman, the Global Coalition for Social Protection Floors and Brot für die Welt, April 2018.

Executive Summary

Social protection systems must be fiscally sustainable so they will provide all residents with adequate social protection in all the challenging situations over the life cycle that pose a risk to livelihood security now and in the future. This is often not the case.

There are two categories of financing of social protection, “contributory” programmes and “non-contributory” schemes. In many countries, contributory pensions, employer paid insurance for workers injured on the job and other social insurance provide social protection to some of the population, albeit usually not for people living in poverty, who are not in a position to pay the mandatory contributions or who do not work in the formal enterprise sector. It is thus also necessary to allocate government
expenditures to social protection systems that cover all people. In particular, tax-based financing is
needed to pay for “social protection floors” (SPFs), which are the parts of social protection that seek to provide at least a basic level of protection for all residents against each of the main contingencies along the life cycle, as defined in the 2012 Social Protection Floors Recommendation 202 of the International Labour Organization.

To help address that challenge, the present paper focuses on how countries may assure the sustainable
financing of social protection floors. It argues that countries need to build strong national tax systems, increase the efficiency in tax collection and administration, and end tax evasion and fraud. In some cases, budget expenditures can be reallocated from less appropriate uses to social protection, as in decisions to allocate savings from reduced fuel subsidies. In quite a number of countries, it will be necessary to raise taxes or other fiscal revenues, including on personal and corporate income, as well as
on property and wealth. Striving for universal social protection, some countries have improved the fiscal resources they capture from extractive industries. Other countries have looked to innovative sources of development finance, such as a financial transaction tax (FTT).

Even when sustainable over the long run, social protection outlays are often threatened during crisis periods when their need is greatest and tax collections plummet. One source of the problem in the case of many developing countries is dependence on volatile sources of tax revenue, as when taxes on a limited number of commodity exports form a large portion of their revenues. The paper thus notes disciplined efforts of some countries to build up reserves during boom times to draw down during times of economic bust. Another approach seeks to redefine the risk-sharing between governments and their creditors.
The paper argues for proposals to design loans and bonds that automatically postpone or cancel debt servicing during periods of economic stress or natural catastrophe, called “state-contingent debt”. These proposals have many supporters but need to be put into practice.

Even if at first sight social protection seems to be a purely domestic public responsibility, there is also an international responsibility to support developing countries in this regard. Indeed ‒ the global community of nations pledged in its 2015 Addis Ababa Action Agenda on Financing for Development to give “strong international support” to help countries “meet the needs of all communities through delivering high-quality [social] services that make effective use of resources” and to “explore coherent funding modalities to mobilize additional resources, building on country-led experiences.”

In this spirit, the paper calls for increased donor government and international organization grants and subsidized loans (that is, “official development assistance”) to help countries develop their social protection systems. International public funds can contribute to the effort of countries to design, implement and finance national floors of social protection, to which end proposals have been made to create a special international fund for advancing social protection.

A related form of international cooperation is to help individual countries to capture more of their own taxes that escape their fiscal systems. Internationally coordinated efforts can effectively reduce tax evasion. Technical assistance is also beneficial to help countries design systems that do not allow opportunities for legal, if unethical, tax avoidance schemes. Additional international cooperation is needed to prevent countries from offering competing tax incentives to foreign investors that erode the national tax base and constitute a fiscal “race to the bottom”.

A third form of cooperation aims to assist developing countries during crisis periods when their social protection needs will be most intense. Thus, in response to the increasing number of environmental and humanitarian emergencies, developing countries and international institutions have established a number of quick-disbursing loan and insurance facilities. Furthermore, when universal social protection systems that disburse cash transfers are already in place, they can provide a ready channel for disbursing emergency funds to individual beneficiaries.

The paper concludes by emphasizing that sustainably financing social protection floors needs to be an
essential part of explicit national sustainable development strategies. Governments can draw upon a new generation of development planning tools and approaches in order to simultaneously address social, environmental and economic dimensions of development over a number of years. They may also consider the desired scope of government expenditures and the interaction of the policies, programmes and required taxation to address national development goals, not least regarding the complementarity of contributory and non-contributory national social protection programmes.

There can be no doubt that social protection is a key instrument to help end poverty and to give people access to opportunities for a self-determined life in dignity. National social protection systems can also contribute to achieve related sustainable development goals, like food security, good health, decent work, gender equality, reduced inequality and cohesive communities. Nevertheless, mobilizing adequate public resources to cover the cost of social protection floors is always contested and a challenging terrain for advocacy. And yet, the challenge can be met because the requisite techniques and mechanisms
of public finance are known to exist.