to finance social protection, freeing fiscal space for deficit paths and/or higher levels of inflation without
other social expenditures; social protection benefits jeopardizing macroeconomic stability. A significant
linked to employment-based contributions also number of developing countries have used deficit
encourage formalization of the informal economy, a spending and more accommodative macroeconomic
remarkable example can be found in Uruguay’s frameworks during the global recession to attend to
Monotax. Argentina, Brazil, Tunisia and many others pressing demands at a time of low growth and to
have demonstrated the possibility of broadening support socio-economic recovery.
both coverage and contributions.
Each country is unique, and all options should be
4. Lobbying for aid and transfers: This requires either carefully examined, including the potential risks and
engaging with different donor governments or trade-offs, and considered in national social dialogue.
international organizations in order to ramp up Given the importance of public investments for
North-South or South-South transfers. Despite being human rights and inclusive development, it is
much smaller than traditional volumes of ODA, imperative that governments explore all possible
bilateral and regional South-South transfers can also alternatives to expand fiscal space to promote
support social investments and warrant attention. national socio-economic development with jobs and
social protection.
5. Eliminating illicit financial flows: Estimated at
more than ten times the size of all ODA received, a Social dialogue: Fundamental to generate political
titanic amount of resources illegally escape will to exploit all potential options
developing countries each year. To date, little
National social dialogue is best to articulate optimal
progress has been achieved, but policymakers should
solutions in macroeconomic and fiscal policy, the
devote greater attention to cracking down on money
need for job and income security and human rights.
laundering, bribery, tax evasion, trade mispricing and
While in some countries, national development
other financial crimes that are both illegal and
strategies and their financing sources have been
deprive governments of revenues needed for social
shaped though social dialogue, in many other
and economic development.
countries this has not been the case. Public policy
6. Using fiscal and central bank foreign exchange decisions have often been taken behind closed doors,
reserves: This includes drawing down fiscal savings as technocratic solutions with limited or no
and other state revenues stored in special funds, such consultation, resulting in reduced social investments,
as sovereign wealth funds, and/or using excess in lack of public ownership, adverse socio-economic
foreign exchange reserves in the central bank for impacts and, frequently, civil unrest.
domestic and regional development. Chile, Norway
National tripartite dialogue, with government,
and Venezuela, among others, are tapping into fiscal
employers and workers as well as civil society,
reserves for social investments.
academics, United Nations agencies and others, is
7. Borrowing or restructuring existing debt: This fundamental to generate political will to exploit all
involves active exploration of domestic and foreign possible fiscal space options in a country, and adopt
borrowing options at low cost, including the optimal mix of public policies for inclusive growth
concessional, following careful assessment of debt and social justice.
sustainability. For example, South Africa issued
Questions to consider on fiscal space options during
municipal bonds to finance basic services and urban
national dialogue include:
infrastructure. For countries under high debt distress,
restructuring existing debt may be possible and i. Reprioritizing Public Spending: Can government
justifiable if the legitimacy of the debt is questionable expenditures be re-allocated to support social
and/or the opportunity cost in terms of worsening investments that empower vulnerable households?
deprivations of vulnerable groups is high. In recent Are, for example, current military, infrastructure or
years, more than 60 countries have successfully re- commercial sector expenditures justified in light of
negotiated debts, and more than 20 have existing poverty rates? Has a recent study been
defaulted/repudiated public debt, such as Ecuador, conducted to identify measures to enhance the
Iceland and Iraq, directing debt servicing savings to efficiency of current investments, including steps to
social programs. tackle and prevent corruption and the
mismanagement of public funds?
8. Adopting a more accommodating macroeconomic
framework: This entails allowing for higher budget
Fiscal Space for Social Protection 3
ii. Increasing tax revenues: Have all taxes and vi. Using fiscal and foreign exchange reserves: Are
possible modifications been considered to maximize there fiscal reserves, for example, sitting in
public revenue without jeopardizing private sovereign wealth funds that could be invested in
investment? Are personal income and corporate tax poor households today? Are excess foreign exchange
rates designed to support equitable development reserves being maximized and used to foster local
outcomes? What specific collection methods could be and regional development?
strengthened to improve overall revenue streams?
vii. Borrowing or restructuring debt: Have all debt
Could minor tariff adjustments increase the
options been thoroughly examined to ramp up social
availability of resources for social investments? Is
investments? What are the distributional impacts of
natural resource extraction adequately taxed? Can
financing government expenditures by additional
tax policies better respond to “boom” and “bust”
borrowing? Have different maturity and repayment
cycles? Have financial sector taxes been considered
terms been discussed with creditors? Has a public
to support productive and social sector investments?
audit been carried out to examine the legitimacy of
Has there been any attempt to earmark an existing
existing debts?
tax or introduce a new one to finance specific social
investments taxes on property, inheritances, viii. Adopting a more accommodating
tourism, tobacco, etc.? macroeconomic framework: Is the macroeconomic
framework too constrictive for national
iii. Expanding social security coverage and development? If so, at what cost macroeconomic
contributory revenues: What is the percentage of stability? Could increasing the fiscal deficit by a
workers contributing to social security? Can percentage point or two create resources that could
contributions to social security be extended to more support essential investments for the population?
workers? Are current contribution rates adequate? Is Are current inflation levels unduly restricting
there scope to introduce innovations (e.g. like employment growth and socio-economic
Monotax in Latin America) to encourage the development?
formalization of workers in the informal sector?
Lastly, have all options been carefully examined and
iv. Lobbying for increased aid and transfers: Has the discussed in an open social dialogue? Have all
government delivered a convincing case to OECD possible fiscal scenarios been fully explored? Is there
countries for increased aid, including budget any assessment missing from the national debate?
support, to support the scaling up of social Are all relevant stakeholders, government,
investments? Has there been any formal or informal employers, workers, civil society, academics, United
attempt to lobby neighboring or friendly Nations agencies and others, being heard and
governments for South-South transfers? supportive of an agreement that articulates an
v. Eliminating illicit financial flows: Has a study been optimal solution in macroeconomic and fiscal policy,
carried out or a policy designed to capture and re- the need for job and income security and human
channel illicit financial flows for productive uses? rights?
What can be done to curb tax evasion, money A good starting point for country level analysis is a
laundering, bribery, trade mispricing and other summary of the latest fiscal space indicators for 187
financial crimes are illegal and deprive governments countries, available in Annex I of "Fiscal Space for
of revenues needed for social and economic Social Protection: Options to Expand Social
development? Investments in 187 Countries".
This policy brief is based on the working paper “Fiscal Space for Social Protection:
Options to Expand Social Investments in 187 Countries ” by Isabel Ortiz, Matthew
Cummins and Kalaivani Karunanethy, published by the International Labour
Organization, Geneva: 2015
The editor of the series is Isabel Ortiz, Director of the Social Protection Department,
International Labour Organization (ILO). For more information, contact: ortizi@ilo.org.
International Labour Office, 4, route des Morillons, 1211 Genève 22, Switzerland
www.social-protection.org