Abstract
The multiple crises – economic, social, political, ecological and climate-related – now facing most people in the world require dramatically increased levels of social protection spending. Yet, the fiscal space for such spending (which increased briefly in a relatively few rich countries during the Covid-19 pandemic, but not elsewhere) has shrunk in the past few years. Countries riddled with sovereign debt are forced to pay debt service often in excess of not just social protection spending but also public expenditure on health and education. Other low- and middle-income countries are worried about running deficits that would reduce their standing in financial markets. In periods of downswing, these economies typically face further punishment from financial investors that further reduce fiscal space. Pervasive illicit financial flows restrict government’s capacities to raise revenues from progressive taxation. Foreign aid flows from advanced countries have dwindled to a trickle and are increasingly diverted to war efforts of allied states or funding of refugees within ‘donor’ countries. 1 When government finances are squeezed, social protection spending is often the first to be cut.
Concerns about all of this are regularly expressed in national and global policy circles. Yet, within and across countries, as well as in the multilateral financial system, the proposed responses have been limited and halting at best, and sometimes even counterproductive at worst. To move forward in any meaningful way, it is important to be realistic, and to identify which strategies have not/are not working, and which have some chances of success with changes in the system.
What is not working
Consider two of the most commonly suggested strategies today: encouraging more private sector participation through various incentives and ‘Public Private Partnerships’, and setting up a global fund for social protection. Both of these have uneven track records and are unlikely to be very effective in the current international economic context.
The first idea, of relying on greater private sector involvement, is problematic for the simple reason that most provision of social protection is inherently not a commercially profitable activity. Social protection must be distinguished from insurance, which can indeed be profitable – although it must be noted that insurance companies are increasingly refusing to take on policies that would cover known risks (e.g. from climate change) that would require protective interventions. Social protection involves a wide range of expenditures that are unlikely to yield profit or often any purely monetary return. This obviously means that private investment would not be forthcoming without significant inducement, which is typically as or more expensive than direct provision by government. So the financing of social protection is essentially inseparable from the idea of increasing fiscal space.
The second idea, which recognises this need for fiscal space but is more multilateral in orientation, relates to creating a global fund that could provide financial resources to countries in need, facing shocks or otherwise requiring support to enable the provision of social protection (De Schutter and Sepúlveda, 2012; see also Razavi in this edition of Forum). It is akin to the idea of a global financial safety net, but typically relies on voluntary contributions from donor countries. Unfortunately, recent experience with such funds has not been very promising (Yeates et al., 2023). Some multilateral funds have faced criticisms about opacity, governance, control by donor countries and selective and often excessively conditional access to resources. Other funds with more democratic governance have found it even harder to raise resources (Yeates et al., 2023). In any case, all such funds are hugely underfunded relative to needs, to the point of making very little difference to the reality in most countries requiring assistance. There is little reason to expect a change in this in the near future, given prevailing geopolitics and the rise of inward-looking nationalism in many donor countries.
What can be done
Even within the known problems with the international financial architecture, there are changes that can be made that would dramatically alleviate the fiscal constraints that limit the provision of social protection. Three areas in particular offer relatively low-hanging fruit for international action: a new approach to sovereign debt resolution; a more ambitious and effective utilisation of the creation of international liquidity in the form of the International Monetary Fund’s Special Drawing Rights (SDRs); and a reform of the global taxation system. 2
It is obvious that sovereign debt distress is preventing many countries from being able to fulfil their obligations to meet social and economic rights of their citizens, including for social protection. It is necessary to create a body – whether an independent authority or a coordination platform – to bring all major public creditors and private creditors together to coordinate debt workouts and restructurings. This must also involve a debt standstill during the period of negotiations, so that interest payments do not accrue over the period; this will also serve to concentrate the minds of creditors for faster resolution. Legislation being considered in the United Kingdom and in New York (whether 95% of sovereign debt contracts are made) would also help the process of ensuring the private creditors join the debt resolution efforts.
The IMF can participate in the creation of a global financial safety net (that would also enable countries to ring fence social protection spending in period of crisis) in two ways: through the creation of an SDR swap facility (akin to the US Federal Reserve’s US dollar swap arrangements, but more widely accessible to all member countries) and through the issuance of new SDRs to be distributed not by quota but according to needs that could be predetermined according to defined norms. The advantage of this is that this is completely costless for any country that does not choose to use the SDRs received, and for those who do use it, the interest rate is relatively low. The issuance of SDRs could be a regular process that would keep the stock of SDRs increasing proportionately along with the increase in global GDP. And the increased allocation could be distributed along two principles. First, to meet the needs of global public investment required to alleviate climate change, whether in terms of mitigation or adaptation, as well as to ensure universal social protection. Second, to be given to countries facing external shocks not of their own making, whether these are climate shocks, or terms of trade shocks, or interest rate shocks, or other pressures. This could ensure that such shocks do not impact on spending for social protection.
The global taxation system is out of date and requires urgent reform. Two areas are the most promising: unitary taxation of multinational enterprises to ensure that they pay the same rate as domestic companies, with a minimum global tax rate, and a tax on extreme wealth, preferably with a global minimum rate for that as well. This would require asset registers listing the beneficial owners of all wealth to be drawn up nationally and shared across jurisdictions. Once again, this requires international cooperation, but the initiative to bring such discussions into the United Nations to work towards a Global Tax Convention is a promising start.
Footnotes
Funding
The author(s) received no financial support for the research, authorship and/or publication of this article.