Service on Finance and Development (Sept20/07)
Geneva, 25 Sep (Kanaga Raja) – Developing countries will need to invest an additional US$1.2 trillion – equivalent to 3.8 per cent of their gross domestic product (GDP) – to close the annual financing gap in social protection in 2020, the International Labour Organization (ILO) has said.
In its latest policy brief, the ILO said that low-income countries represent US$77.9 billion of this total financing gap, equivalent to 15.9 per cent of their GDP.
According to the ILO, the amount required to close the financing gap in social protection has increased by approximately 30 per cent since the onset of the COVID-19 crisis.
“This is the result of: (a) the increased need for health-care services and income security for workers who have lost their jobs because of lockdown and other measures, and (b) the reduction of GDP caused by the crisis,” it said.
“Low-income countries must invest approximately US$80 billion, nearly 16 per cent of their GDP, to guarantee at least basic income security and access to essential health care to all,” said Ms Shahrashoub Razavi, Director of the ILO’s Social Protection Department.
“Domestic resources are not nearly enough. Closing the annual financing gap requires international resources based on global solidarity,” she added.
According to the ILO study, even before the COVID-19 crisis, it was clear that the global community was failing to live up to the legal and policy commitments it had made in the wake of the last global catastrophe – the 2008 financial crisis.
Progress towards building national social protection floors, in line with Recommendation No. 202 and SDG targets 1.3 on social protection and 3.8 on universal health coverage, has lagged behind.
Large coverage gaps persist that deny people’s enjoyment of the right to social security. When the crisis hit, as many as 4 billion people had no access to social protection benefits at all.
More than three quarters of the global population had no access to comprehensive social protection and for even more people, income losses have been only partially mitigated, said the ILO.
“These large and persistent gaps in the coverage, comprehensiveness and adequacy of social protection are linked to significant financing gaps that have been further exacerbated by the COVID-19 pandemic, which has both increased the urgent demand for social protection and eroded government resources by diminishing tax and social insurance revenue.”
The ILO study noted that a range of government action is under way to cushion the most adverse health and socioeconomic effects of the pandemic, including the introduction of many (though largely temporary) social protection responses.
“However, mere stop-gap measures will not be enough to protect people in the current crisis and beyond. There is an urgent need for countries to fulfil their prior commitments and build and maintain national social protection floors as part of their social protection systems,” it said.
In doing so, countries would guarantee access to essential health care and income security over the life cycle of their populations by creating and safeguarding the necessary fiscal space for social protection.
The study said an additional US$1.2 trillion would be needed in 2020 to fully finance the total cost of a set of universal benefits that could constitute a social protection floor in developing countries, representing an additional investment of 3.8 per cent of these countries’ GDP.
Regionally, the relative burden is particularly high in Central and Western Asia, Northern Africa and Sub- Saharan Africa (9.3, 8.3 and 8.2 per cent of GDP, respectively).
In terms of income classification, the relative size of the financing gap is much larger for the group of low- income countries (15.9 per cent of GDP) than for lower-middle-income countries (5.1 per cent of GDP) and upper-middle-income countries (3.1 per cent of GDP).
Summarizing the incremental financing needs over the period 2020-2030, the study said for the year 2030 alone, the annual financing gap that needs to be bridged to achieve universal coverage would amount to US$1.2 trillion for all developing countries (equivalent to 2.2 per cent of their GDP), including US$686.3 billion for upper- middle-income countries (1.7 per cent of GDP), US$413.4 billion for lower-middle-income countries (3.2 per cent of GDP) and US$100.9 billion for low-income countries (11.5 per cent of GDP).
The ILO study noted that as a response to the COVID-19 crisis, 196 countries have introduced domestic fiscal measures, amounting to US$10.6 trillion (as of 3 September 2020). However, only 0.06 per cent of this amount has been mobilized in low-income countries.
Those domestic efforts have been complemented by international resource mobilization, it said.
International financial institutions and development cooperation agencies have announced several financial packages to help governments tackle the various effects of the crisis.
As of 3 September 2020, these institutions have pledged about US$1.3 trillion, including US$1 trillion pledged by the International Monetary Fund and about US$160 billion by the World Bank; up to US$126.6 billion has been effectively approved and allocated to support countries in the areas of social protection and health.
The types of financial assistance vary and include emergency assistance packages, credit lines, debt service relief and grants. Most funds, however, are committed in the form of concessional loans (69 per cent) or regular loans (28 per cent).
“Although this national and international resource mobilization provides important short-term financial assistance in the context of the COVID-19 crisis, it represents only a small proportion of what is needed to close the social protection financing gap in developing countries,” said the ILO.
For developing countries to be able to bridge these gaps and establish national social protection floors, resource mobilization efforts should be both increased and safeguarded against the austerity measures that are already emerging as the COVID-19 crisis recedes, it emphasized.
“Countries should invest more to guarantee adequate and comprehensive social protection for all. They should also invest better by ensuring that resource mobilization is sustainable, efficient and equitable.”
A range of options exist for countries at all levels of development to increase fiscal space for social protection, said the ILO, pointing to eight different strategies that could be considered.
These strategies include: expanding social security coverage and contributory revenues; increasing tax revenues; eliminating illicit financial flows; reallocating public expenditures; using fiscal and central bank foreign exchange reserves; managing debt – borrowing or restructuring sovereign debt; adopting a more accommodating macroeconomic framework; and increasing official development assistance (ODA) and transfers.
In principle, national social protection systems, including floors, should be financed from national sources, a process which is usually referred to as domestic resource mobilization.
“However, countries whose economic and fiscal capacities are insufficient may need to seek international support, at least in the short-to-medium term,” said the ILO.
The magnitude of domestic efforts required to finance social protection floor financing gaps may be significant, it added.
On average, such gaps represent about 13.5 per cent of total tax revenues, but in low-income-countries the ratio is much higher, at 45 per cent of total tax revenues.
Governments may not be in a position to spend 45 per cent of their tax revenues on social protection, because they have many other priorities to finance, said the ILO.
Financing the social protection floor from taxes is therefore unlikely in low-income countries. In countries with limited capacity to generate domestic resources, external assistance will therefore be required to complement national efforts to create fiscal space, said the study.
The ILO noted that social protection systems are typically designed through a combination of tax-financed non- contributory schemes and social insurance schemes that are usually funded by workers’ and employers’ contributions.
“Increasing the contribution base by increasing the effective coverage and/or revenue from social security contributions is an important strategy to finance social protection and ensure higher levels of protection.”
Additional revenue may be obtained by increasing contribution rates or else through improved administrative efficiency, better compliance in terms of contribution collection or by extending contributory schemes to previously uncovered groups (such as informal economy workers, including the self-employed).
The study said social security contributions currently amount to 0.4 per cent of GDP in low-income countries, 2.5 per cent of GDP in lower-middle-income countries and 5.8 per cent of GDP in upper-middle-income countries.
Simulation results suggest that there is still some untapped capacity of contribution systems, it added.
Low-income countries could potentially double their contribution levels to 0.8 per cent of GDP over the next decade.
Across all developing countries, social security contributions as a percentage of GDP could potentially be increased by 1.2 per cent to reach 6.3 per cent of GDP.
Despite the Addis Ababa Action Agenda’s call (in 2015) for enhanced ODA to support financing for sustainable development, many countries still fall short of their commitments, said the study.
At current levels, ODA would be insufficient to close social protection financing gaps even if all of it were allocated to that single priority.
In reality, the share of disbursed ODA allocated to social protection represented a mere 0.0047 per cent of the gross national income of donor countries in 2017.
To complement regular sources of financing and fill remaining gaps, a range of innovative sources of financing could be considered and some have already been implemented, said the ILO.
These include taxes on the trade of large tech companies, the unified taxation of multinational companies, taxes on financial transactions or airline tickets, or a billionaires’ tax.
“Combating corporate tax avoidance and evasion, including the “base erosion and profit shifting” strategies employed by companies to shift operations from high to low tax regimes, would also increase tax revenue significantly.”
Debt-based borrowing mechanisms could include debt conversions or social impact bonds, said the ILO.