Module 13: Assessing affordability and impact on fiscal space ILO, 2013

Key questions What is affordability? What is fiscal space? How to forecast government revenues and expenditures? How to calculate fiscal space and finance fiscal deficit? How to convince governments to invest in social protection?

Affordability SPF benefits proposed in the ABND exercise may be financed in many ways, depending on policy choices and the social model in the country: – workers’ and employers’ contributions – government budget For contributory schemes, the contributions must be affordable for workers and employers If out-of-pocket payments are required, they should not limit access to social services

Fiscal space Fiscal space is the budgetary capacity of a government to provide resources, without jeopardizing the sustainability of its financial position or the stability of the economy If budgetary capacity is not sufficient, additional fiscal space may be created by raising income taxes, value added taxes, borrowing from international institutions or markets, cutting down on low-priority expenses Borrowing should not compromise macroeconomic sustainability in the long-term

Forecasting GGO Official budget projections or projections made by research institutes (e.g. TDRI Thailand) should be used Based on historical data, government revenues and expenditures can be forecast: – Government revenues and expenditures are expressed as a percentage of GDP at current price for previous years – It is projected in the same proportion When different scenarios of GDP data are available, several forecasts of government revenues and expenditures may be made

Forecasting government revenues

Forecasting government expenditures

Calculating fiscal space Projected government balance = government revenues - government expenditures In developing countries, budget balance is usually negative Due to GDP growth, the negative balance may progressively shrink in a few years When SPF benefits are introduced, the budget balance becomes more negative and fiscal space will take longer to become positive

Forecasting budget balance Fiscal space after implementing proposed SPF scenarios (as a percentage of GDP), Thailand

Convincing governments to invest in social protection Simulations and ex ante assessments (e.g. Viet Nam) of the impact of social protection policies on individual and household expenditures and poverty status need to be performed Direct effect: When households avail social protection benefits, their income increases, thus reducing poverty Multiplier effect: With higher income, households buy food, goods and services, thereby generating more income for the economy Behavioural effects: When households use health care and education services, it leads to better health, higher productivity, increased human capital

Impact of social protection Framework of the “Rate of return on investment in social protection” model

Impact of social protection Model on the “Rate of return on investment in social protection” in Cambodia (draft)