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What does Public Finance and Social Protection entail?
We look into this below:
Labor Market Participation
A broad decline of people in the workforce is placing stress on many social protection systems.
The global labor force participation rate among those 15 years of age or older in the US fell to 61.9% as of 2017, from 65.4% as of 1990, according to data published by the World Bank; that roughly mirrored a global decline, to slightly less than 62% from 65.7% over the same period, according to World Bank data.
A low rate of labor force participation (the number of people employed or actively looking for work relative to an entire population), triggered by ageing workers, mandatory retirement rules, cultural barriers to women in the workforce, and weak rates of job creation, can undercut a country’s social protection systems. In the US, for example, the participation of men in their prime in the labor force has been in decline for more than a half a century, according to a report published by the Brookings Institution in 2017 (masked in part by the influx of women into the country’s labor force in record numbers, until 1990). This decline has contributed to stagnation in terms of rising (or, not rising) incomes, and has also impacted the tax base - as fewer employees generate payroll taxes, and more people require public assistance.
Increasing labor market participation has been proven to trigger economic growth, and better integrating older workers in particular is a hot topic in many countries. In the United Kingdom, the labor force participation rate has actually increased in recent years, to 78.5% in 2017 from 76.3% as of 2010, according to OECD data. One potential reason for this is heavy immigration from other European Union member states - which may be impacted by the UK’s plans to leave the EU following the Brexit referendum in 2016. Another cited cause is change to UK employment regulation - which, for example, has made it easier to be a working parent. This is just one example of a recent, broader shift from passive income support (like unemployment benefits) to more creative, proactive approaches. The UK is not alone.
As of 2017, according to the Organization for Economic Co-operation and Development, there was a broad range of labor force participation rates around the world, from 58% in Turkey, to 74.2% in Russia, and 88% in Iceland.
During the second half of 2021, what had been a modest and uneven global labor market recovery lost momentum. World Employment and Social Outlook: Trends 2022 provides a comprehensive assessment of how the labor market recovery has
unfolded across the world, reflecting different national approaches to tackling the COVID-19 crisis. It analyses global patterns, regional differences and outcomes across economic sectors and groups of workers. The report also offers labor market projections for 2022 and 2023. Since aging is a dynamic yet linear and relatively predictable process, age-readiness can, with the requisite political will, technical expertise, and creative use of resources, be planned for and implemented.
Targeting the Poor
According to an article published by Eurostat, the number of people in the European Union at risk of poverty or social exclusion in 2016 was higher than it had been in 2008 - despite a European target of reducing this population by 20 million, by the year 2020. Within individual EU member states, the effectiveness of social benefit programs for helping those at risk of poverty varied greatly, according to the article; while Finland was able to use such social transfers to decrease its poverty rate, in Romania transfers were far less successful, according to the report.
Designing social protection programs with better data can help greater numbers of people. Differences in the effectiveness of social protection spending can result from the underlying poverty levels before related programs begin, but they can also result from the design of that spending, according to the report.
In 2014, the World Bank reported that despite Bangladesh spending the equivalent of roughly 2% of its GDP on social safety net programs, about 70% of the country’s poor people were still not receiving any safety net support - largely due to shortcomings in identifying beneficiaries, and weak administration.
In developing countries, the design of social insurance and poverty alleviation programs must enable the accurate targeting of the poor, and the adequate enforcement of related regulations. This is particularly true in regions where employment in the unofficial, grey economy is extensive, and where information for targeting purposes is therefore limited. In Iraq, for example, where development has been undercut by decades of conflict and economic decline, overall progress towards poverty reduction stalled after 2007, according to a report published by the International Bank for Reconstruction and Development in 2016. The report noted that a targeting system in Iraq for providing cash transfers to nearly 1 million households resulted in only 11% of the poor receiving their benefits.
In response to Iraq’s challenges, according to the report, the World Bank coordinated a knowledge exchange program with other countries including Turkey and Lebanon, which shared details about their respective cash transfer and targeting programs. Iraq has now developed a Social Protection Strategic Roadmap through 2019, according to the report. The need for better targeting is not confined to developing economies.
Stabilizing Economies, Keeping Protections
Sovereign debt restructurings can help economies rebuild, but have also stirred controversy. This was often done in ways that drew criticism from people who felt their social benefits and protections were being unfairly sacrificed as a result.
The global financial crisis roughly a decade ago, and Europe’s subsequent debt crisis, abruptly pushed governments around the world into a situation where large parts of their economies and financial systems had to be restructured.
Many other countries have pursued sovereign debt restructuring. However, the process has created some controversy, as poorer countries may have difficulty enforcing terms of a restructuring deal on large investors; this can ultimately hinder the ability of these countries to use the process to fully recover financially. In addition, "vulture” investors can cheaply buy up old bonds that a country is seeking to exchange, and then pursue litigation with that country in hopes of ultimately receiving 100% of the bonds' face value.
In Greece, for example, where officials at one point were forced to disclose that the deficit was twice as high as what had previously been announced, controversial austerity measures were implemented beginning in 2010 that slashed government employee salaries and pension payments.
According to a study subsequently published by researchers at the University of Portsmouth, for every 1% decline in Greek government spending, there was a 0.43% increase in suicides among men - and more than 500 men had killed themselves solely because of austerity during the early stages of the measures.
In addition to financial bailout programs, Greece, like other countries following the financial crisis, also restructured its sovereign debt - that is, it pressed creditors to trade in existing sovereign bonds for new bonds with far lower face value, granting the country much-needed fiscal relief.
A restructuring first implemented by Argentina after its sovereign default in 2001 was only fully resolved in 2016, after a lengthy legal battle with investors. In a policy paper published in 2016, the scholars Martin Guzman and Joseph Stiglitz noted that since 1970, more than half of restructuring episodes with private creditors were followed by another restructuring or default within five years. The scholars called for a “soft law regime” to govern sovereign debt restructurings built on United Nations principles, and reliant on social norms and market acceptance rather than legal force. In 2018, Guzman noted in an article published by the Institute for New Economic Thinking that the framework for restructurings remained fraught with perverse incentives.
Finding the Right Fiscal Policy
Policy-makers must find ways to address deficits that do not hinder economic growth. Some economists argue that cutting government spending is best for restoring fiscal health and stirring growth, and others counter that it is only by increasing spending that economies can truly be reinvigorated. While raising taxes can also be necessary to tackle budget deficits, arguments have been made that tax hikes can choke economic growth by discouraging work, investment, and innovation. The wrong balance between raised taxes and reduced spending can have disastrous effects.
Roughly a decade after the global financial crisis, national debt levels in advanced economies are near their highest levels since World War II, averaging 104% of GDP, according to a study published in the International Monetary Fund’s quarterly magazine in 2018. That places significant pressure on governments to find ways to cut spending or increase tax revenue (or somehow do both), according to the study. This is particularly true now, as central banks seem poised to gradually increase interest rates, thereby potentially directing more government funds into making interest payments and leaving less for public services like infrastructure and education.
While countries need to strike a balance between taxes and spending as they seek to balance budgets and preserve social protections, there is ongoing debate about which of the two elements to lean on more heavily. There are certain types of spending that can actually lower a budget deficit, primarily related to “program integrity” measures that target fraud, tax evasion, and bureaucratic mistakes, according to an analysis published by the Brookings Institution in 2015.
As policy-makers seek the best formula for addressing their country’s particular challenges, they must be mindful not only of the impact it may have on deficits and economic growth but also of the potential impact on large parts of the population - and how the population may react. In France, for example, a government decision in late 2018 to increase gasoline taxes in order to reduce reliance on fossil fuels sparked regular street protests by thousands of gilets jaunes (“yellow vests”) for better wages and better public services.
Such spending aimed at curbing improper payments in the US’s Medicare health insurance program for people 65 or older could yield about $14 for every dollar spent, according to the analysis, while spending an additional $1 billion annually on reviews meant to determine whether or not to grant disability insurance could save the US’s Social Security Administration $43 billion.
Sustainability and Social Protection
Governments everywhere are faced with difficult decisions. Ageing populations are pressuring government budgets around the world.
By the year 2050, the portion of the global population aged 65 or older will double from 10% to 20%, and about 80% of the elderly will be living in low-income countries, according to figures published by the World Bank in 2018. Yet, only about one third of the collective population in these low-income countries currently has formal retirement income, according to the figures.
According to the Organization for Economic Co-operation and Development report, Social protection systems were designed around the idea of a single, full-time employment relationship. This poses a problem for those who are self-employed or change jobs regularly. One interesting standard frameworks approach to solve this, is the so-called artists’ insurance scheme in Germany, which covers artists and writers for health and pensions - but not for unemployment. More broadly, untying social protection from employment (by granting entitlements based on residency) could close future coverage gaps, according to the report.
The dynamic created by an ageing population and a lack of available retirement funding is also concerning in developed countries; about half of the workforce in private industry in the US has no private pension coverage, while there will only be 2.2 active workers for each Social Security beneficiary by 2035, down from 2.8 workers currently, according to a bulletin published by the Social Security Administration.
China’s population ageing problem is even more severe than those in other countries, due to its one-child policy which was discontinued in 2016, according to a study published in the Journal of Policy Modeling. If the Chinese government does nothing to reform its social security system, the accumulation of related debt will be explosive, according to the study.
As public finances around the world are impacted by population ageing and fiscal crises, it raises questions about how public systems will be able to continue providing protection for large numbers of people.
Countries receiving significant numbers of migrants must also determine how best to offer protection to these people; more than one in five labor migrants is not covered by a social protection scheme, according to a briefing published by the Swiss Agency for Development and Cooperation in 2017, while more than half of migrants cannot take social protection benefits back to their home country.
PUBLIC FINANCE & SOCIAL PROTECTION
The world is becoming increasingly urban and older. This growing confluence of urbanization and aging is uneven, and cities and countries are at different points on the two trajectories.
As life expectancy rates increase, and government participation in benefits programs declines, new approaches are needed in order to support ageing populations. Meanwhile, the methods adopted to stabilize national economies must better account for the resulting impacts on vulnerable populations, and the systems we use to identify those most in need must be improved.
Many countries in both the developed and the developing world face serious challenges when it comes to providing retirement security for the elderly, opportunities for young people, and broader financial well-being for everyone.
