Creating and Sustaining Fiscal Space for Expanding Social Protection Nard Huijbregts Economic Policy Research Institute (EPRI), Cape Town, South Africa Arusha, December 2014

Overview Domestic Resource Mobilization – Tax Revenue – Non Tax Revenue ODA Efficiency gains and reallocation Deficit financing/borrowing Sustaining fiscal space Creating fiscal space

Domestic Resource Mobilization Percentage of GDP collected as revenue Source: World Development Indicators 2014

Tax Revenue Broadening the tax baseTax exemptionsTax evasion

Tax Revenue Broadening the tax baseTax exemptionsTax evasion 50 entities pay 80 percent of all tax Large informal sector

Tax Revenue Broadening the tax baseTax exemptionsTax evasion VAT (38%) Companies and individuals (5%) Mining (23%) Tanzania Investment centre (20%)

Tax Revenue Broadening the tax baseTax exemptionsTax evasion 1 percent in 2009

Tax Revenue Broadening the tax baseTax exemptionsTax evasion New taxes, potentially ring-fenced

Non Tax Revenue New sources – 0.2 percent of GDP Collection leakage – 0.5 percent of GDP Great potential coming from natural resources – Gas only is already between 8 to 17 percent of GDP – However Uncertain Existing contracts

Overseas Development Aid Increasing commitment to Social Protection Although increasing in absolute value, decreasing as share of government revenue Source: World Development Indicators 2014

Deficit Financing IMF aim 4.5 percent of GDP In light of high returns on investment and low interest rates, sustaining deficit could be justified All together, substantial room for increased domestic revenue mobilization

Sustainable?

Dependency Ratios

Expenditure Trend Social Protection expenditure declining – Percentage of GDP – Percentage of GDP per capita

Expenditure Trend Cost as percentage of GDP

But it doesn’t stop there Consequence of change in inequality on cumulative GDP growth Source: OECD 2014

Growth Dividend - Low Cost as percentage of GDP

Growth Dividend - Medium Cost as percentage of GDP

Growth Dividend - high Cost as percentage of GDP

Conclusions Substantial room for domestic resource mobilization – Tax reform – Gas revenue – Political will is key factor determining whether this can and will also be allocated to social protection spending Demographic and economic dividend safeguards sustainability – Investing in child sensitive social protection likely further optimizes sustainability