What and why
As noted in the ESCAP Action Plan to Strengthen Regional Cooperation on Social Protection in Asia and the Pacific, governments should allocate sufficient public funds, and increase these levels where required, towards the realization of social protection for all. Methods for mobilizing resources may include more effective tax collection and reprioritization of public expenditures, but also identification of new revenue bases. Finding fiscal space for sufficient investment is a government’s responsibility to ensure the right to social protection is upheld. Without an effective financing framework, investments are likely to remain low, resulting in poor availability and low benefit levels.
Finding fiscal space for social protection is a matter of political will rather than resources. It is often argued that social protection is not affordable or that government expenditure cuts are needed when facing fiscal constraints. However, evidence shows that this is not the case. When there is political will, sufficient budget will also be made available, even in low-income countries. In Asia and the Pacific, there is no strong link between a country’s wealth and its level of investment in social protection. ESCAP and Development Pathways have developed a social protection simulation tool (https://spot.unescap.org/simulator) that gives governments a better understanding of the required investment and impact of different benefit designs. Generally, introducing universal old-age, child and disability benefits for a country in the region would have a substantial impact on reducing poverty, boosting consumption and decreasing inequality, and would only require an investment of 2 to 6 per cent of GDP.
Governments should explore options to reprioritize existing public spending in favour of social protection. One approach is to identify and replace high-cost and low-impact investments with investments on social protection. Another option is to reprioritize spending within the social protection sector. For example, small, fragmented schemes that often overlap should be replaced with inclusive life cycle social protection schemes that generate greater socioeconomic impact. This also reduces high administrative costs, often associated with, for example, poverty targeting.
Reprioritization of existing public expenditure can also include the removal of subsidies on, for example, fuel, agricultural inputs, or food, many of which disproportionately benefit the more affluent who consume more subsidized goods. Replacing subsidies with inclusive life cycle social protection systems that benefit everyone will not only strengthen solidarity across generations and socioeconomic groups, but would also build trust in the government. This generates wider public support and, in turn, increases political will.
Governments should also explore strategies to increase tax revenues. Tax policy offers governments many options to increase revenues while also reducing inequality. Implementing a progressive tax policy, that increases marginal income tax rates according to additional income, alongside effective income tax collection can increase revenues and position the government to increase investment in social protection. This can be complemented through taxing wealth, property and capital gains to more effectively address inequality. Such progressive tax policies are considered pro-poor in approach as compared to consumption taxes, such as VAT, which is regressive in approach as low-income families spent a higher share of earnings on basic goods. Governments should also ensure businesses pay their fair share through the effective enforcement and collection of corporate taxes.
Another innovative way for governments to finance social protection is by tackling illicit financial flows (IFFs). Curtailing capital that is illegally earned, transferred, or used has the potential to generate considerable additional resources for socioeconomic investments, including social protection. This may involve traded goods that are mispriced to avoid higher tariffs, wealth funnelled to offshore accounts to evade income taxes and unreported movements of cash.
Contributory social protection schemes, such as social insurance pensions, unemployment benefits and workplace injury benefits, provide an option to finance social protection partially through contributions from current or future beneficiaries. Several types of financing mechanisms exist for contributory schemes, often financed through either: a) a Pay-As-You-Go approach, where benefits are paid from the contributions of current contributors; or b) a funded approach, where contributions are invested to increase the value of the overall fund.