1.1 Potential Sources of Revenue

Targeting within Universal Social Protection | 61

since then has moved to general revenues. Other countries have used indirect taxes to finance social spending. By 2010, 40 percent of Argentina’s pensions were directly financed by consumption taxes; 2.5 percent of value added taxes in Ghana pays for social health insurance; Algeria and Mauritius use tobacco taxes to supplement social security revenues; and sin taxes in the Philippines, accounting for 1 percent of GDP in 2015, financed the extension of subsidized health insurance to 40 percent of the population as well as insurance coverage for the elderly.

Table 1.1 summarizes the different revenue sources and their potential impacts. On the spending side, Indonesia reduced energy subsidy spending by 71 percent between 2014 and 2017 and redirected it in part to investments in infrastructure, health, and social protection, the latter increasing by 28 percent over the same period. The Islamic Republic of Iran (2010), Jordan (2013), and Pakistan also replaced energy subsidies with new or expanded cash transfers. Ultimately, a combination of both new revenues and redirected spending can be used; this has been the case for social pensions in Bolivia, Brazil, Costa Rica, Mexico, and Thailand. It was recently estimated that a combination of closing value added tax exemptions, further reducing energy subsidies, and increasing tobacco excises would

Table 1.1 Potential Sources of Revenue

Revenue Source Revenue potential

Growth friendliness Redistributive potential

Costs of administration

Cost of compliance

Personal income taxes Variable Low High High Medium/ High Corporate income taxes Medium Low Low Medium/High High

General consumption taxes

High Medium Low Medium Medium Excises Medium/ Low Medium Low Low Low

Property taxes

Medium/ Low High Medium/High High Medium

Social security contributions

Medium Low Low

Low Low Green taxes Low Medium/ High Medium/Low High Medium User fees Medium Medium/ High Low Medium Medium/ Low Royalties Medium/ High Low Low Medium Medium

62 | Revisiting Targeting in Social Assistance

generate 1.8 percent of GDP in Indonesia, which would be more than adequate to fund the 1.5 percent of GDP increase needed for social protection.

Economic stimulus packages around COVID-19 in their first six months cost more than twice what was spent during the Great Recession of 2008–09. In their COVID-19 responses, low-income countries were constrained and mustered about 2.5 percent of GDP for stimulus, about half the average of approximately 5 percent of GDP in other emerging and developing economies, and far less than the 10+ percent average in advanced economies. About 18 percent of stimulus spending was devoted to social protection. Average COVID-19 emergency social protection spending was US$243 per capita—ranging from US$695 in high-income countries to only US$4 in low-income settings. The latter amounts to only 0.51 percent of GDP per capita. For low-income countries, the financing was all external. Domestically, lower- and upper-middle-income countries have financed 37 and 47 percent, respectively, of their policy responses. High-income countries have financed 100 percent of their response domestically. The common approach was restructuring or reprioritizing budget lines, but nearly half the countries incurred domestic debt and deficit spending, while others tapped state reserves, contingent funds, and fiscal savings (Almenfi et al. 2020).

Post-COVID-19, the fiscal prospects are among the grimmest seen for many years. The International Monetary Fund’s January 2021 Fiscal Monitor shows the world average fiscal deficit at 11.8 percent of GDP, which is nearly 8 percentage points higher than pre-COVID-19, and world debt levels at 98 percent of GDP, up 15 percentage points. Even with growth expected to resume in 2021, for emerging and developing countries, aggregate output in 2022 is expected to remain 6 percent below its prepandemic projection, and the pandemic will leave lasting scars on productivity, including through its effects on the accumulation of physical and human capital (World Bank 2021a). Moreover, even before COVID-19, emerging market and developing countries faced a projected weakening of potential growth in the next decade. Their government debt had risen by 11 percentage points in the past decade, and their fiscal deficits had widened substantially after the 2008–09 crisis, peaking in 2016 (World Bank 2019). In Africa, for example, which accounted for just over half of world poverty in 2015, half the countries were at high risk of or in debt distress at the end of 2018 (Beegle and Christiaensen 2019). In International Development Association (IDA) countries, government debt increased by 15 percentage points of GDP between 2011 and 2019. Government debt-to-GDP ratios could rise by a further 8 percentage points in 2020. Moreover, in IDA countries in 2020, government revenues fell from 15.7 to 15.0 percent of GDP, reversing the progress made on domestic resource mobilization since 2012 (World Bank 2020a).