Universal Social Protection: Fiscal Space And Sustainability: Dr. Lok Nath Bhusal

The government of Nepal has been implementing a number of social protection schemes, such as social assistance, social insurance and labour market interventions, across various agencies. Conflict and disaster relief schemes can also be categorised as other versions of social protection.

 

Financing provisions

Over the years, the government has not only increased the number of such schemes, but the public expenditure on these schemes has also increased. While Nepal’s current level of public expenditure on social protection is not that high as compared to other South Asian countries, there is a debate going on regarding the fiscal sustainability of social protection financing in Nepal. This article is an attempt to discuss and clarify on the financing provisions made in the draft National Social Protection Framework (NSPF) prepared by the National Planning Commission (NPC). 

 

The NSPF is the first such public document which sought for a comprehensive social protection system based on the Social Protection Floor (SPF) approach floated by the International Labour Organisation (ILO) after its endorsement by the ILO’s tripartite constituents – the government and employees’ and workers’ organisations.

 

The SPF stresses that, depending on the abilities of national governments, at the horizontal level, minimum social security should be provided to all, namely by guaranteeing access to essential health care and minimum income security for all. Then, at the vertical level, the government should progressively ensure higher levels of protection, namely through social security benefits of guaranteed levels and voluntary insurance under government regulation.

 

The ultimate destination of such an extension of social protection across horizontal and vertical lines is to institutionalise a system of rights-based universal social protection across the globe at a time when only 13 per cent of the global population is covered by at least some form of social protection. This mission has huge public finance implications for a developing economy such as Nepal.

 

Considering this, the NSPF stresses on exploring all possible fiscal scenarios - through fiscal sustainability assessment - and give a policy direction towards effective implementation of this framework. It also states that while analysing fiscal space and sustainability, consideration should be made in analysing the possibility of increasing the tax revenue, reducing inefficiencies and tackling rampant corruption, increasing foreign aid, borrowing or restructuring external debt and adopting a more accommodating macroeconomic framework. Along with strong political will, there is no doubt that through such a holistic consideration only a genuine fiscal envelope can be developed for universalising social protection. 

 

In its review of the social protection expenditure, the NSPF states that ‘prior to 2007, Nepal’s overall social protection spending was low by South Asian standards and skewed towards public sector pensions. Since FY 07/08, increased government expenditures have helped to diversify the social protection system from just safety nets and pensions to labour market interventions, social care services, social funds and fertiliser subsidy programmes’.

 

This follows the overall patterns in other South Asian countries. Besides increases in public sector pensions, we can also count part of the post-conflict peace expenses behind the increase in the social protection expenditure in the country. Besides these developments, as reported by both the ADB and the World Bank, social protection expenditure is not pro-poor in the country, as the bulk of the social protection benefits goes to the formal sector workers (pensions) and non-poor households (social assistance allowances).

 

In the absence of a major labour market-based social intervention, similar to that of the National Employment Guarantee Scheme in India, the public expenditure on labour market-based social protection is very limited in Nepal.

 

Portraying Nepal’s economic health as good, the NSPF states that the rising expenditures on social protection after 2007 have been funded through revenue and foreign aid. The framework also states that social protection is essential for sustained peace and human development.  The fear that the expanded programmes would impair the fiscal health has not borne out.

 

Considering the fiscal ability of the government, contributory social protection schemes for the formal sector, such as the one per cent social security tax on all employees, have been highlighted by the framework. It also considers the fiscal implications of extending various existing cash transfer schemes and states that ‘given the financial constraints, dramatic expansion of a comprehensive social protection system seems to be a distant possibility in Nepal. Low level of economic growth, huge trade deficit, stagnating manufacturing and agriculture sectors make revenue prospects less promising for the next few years.’

 

However, the framework also states that ‘there is enough room to be optimistic. Almost all core programmes are already underway. Some of the core social protection programmes are run already full-coverage and others on the basis of geographical and categorical targeting. This gives space for gradual expansion.

 

‘Revenue collection for the last two years has been quite encouraging. Efforts will be made to sustain this trend. Many INGOs, NGOs, community-based organisations and self-help groups have already embarked on various forms of protection activities. Development partners are also engaged in many activities, which have social protection outcomes.’ Indeed, these silver lines are indications of Nepal’s move towards the social protection floor discussed above.

 

The draft framework has suggested following financial steps for extending the social protection floor across the horizontal and vertical lines: First, it has suggested increasing the tax collection by revising the taxation system. Widening the tax base and stemming the leakages have been sought. A progressive tax structure has been encouraged from the point of view of equity as well.

 

Secondly, undertaking a regular and rigorous review and analysis of the public expenditure system has been suggested to explore and optimise the fiscal space along with the reprioritisation of public expenditure on the basis of efficiency and effectiveness. Thirdly, the promotion of contributory and voluntary schemes has been suggested to reduce the pressure on the government resources.

 

Fourthly, technical and innovative support of the development partners has been suggested, especially in designing an innovative payment system, developing a management information system and ensuring capacity building. A sector-wide approach (SWAp) has been suggested to create an Integrated Social Protection Fund, besides partnering with the development actors to improve and strengthen the delivery of basic social services.

 

Foreign aid is also sought in the areas of disaster preparedness and relief operations, but the framework makes it clear that ‘no internal and external loans will be accepted to finance core social protection programmes’ as a strategy to reduce dependency on foreign aid.

 

Fifth, reforms for enhancing efficiency at the different levels of governance have been suggested to reduce the operational costs of the social protection schemes. The Cambodia-style single window system of social protection system will certainly be useful for Nepal. Sixth, a ‘more direct contribution from the civil society and community-based self-help initiatives, or in the case of health care through co-payments or subsidised services’ has also been considered as an additional option for sustaining social protection financing in the country.

 

The NSPF identifies one critical choice between expanding the coverage and enlarging the size of benefit. While to meet the Social Protection Floor recommendations, both expanding the coverage (horizontal) and enlarging the benefits are necessary, the framework has made a modest commitment by stating that ‘alignment of the financing strategy will be made with categorical or geographical targeting, making it possible to upscale progressively.’

 

Although the framework highlights the utility of traditional social protection instruments and self-help for reducing pressure on the government resources, the operational reality of such schemes are in serious doubt at a time when the Nepalese society is increasingly becoming liberal and individualistic. However, from a long-term perspective, the general generosity of the Nepalese people can realistically be harnessed by strengthening the tax system and enhancing good governance, thereby creating fiscal space and sustainability of social protection in Nepal.

 

Moreover, the framework also highlights other forms of social protection schemes such as ‘streamlining of social funds like the Poverty Alleviation Fund, use of Welfare Fund under the Bonus Act and Foreign Employment Act, and mobilising the resources of self-help groups.’

 

Certainly, efficient and effective operation of these instruments will significantly reduce poverty and vulnerability, thereby reducing the demand for other forms of social protection, such as unemployment benefits. Moreover, it is quite straightforward that creating massive decent employment opportunities across different sectors of the economy will also improve social protection outcomes with reduced public spending.

 

Social protection floor

On the whole, the NSPF, along with its holistic considerations of fiscal space and sustainability, is a welcome step towards creating a social protection floor in Nepal. As discussed in my earlier article entitled Earthquake, Poverty and Social Protection, in the face of recurring natural and non-natural disasters, people are in need of more and better social protection coverage and benefits.

 

It should be emphasised here that calibrating fiscal space for various social protection schemes, although a daunting task, must be one of the fundamental tasks of any responsible government.

 

(Dr. Bhusal, a doctorate in the Political Economy of Poverty and Social Protection in Developing Countries, is associated with ILO-Kathmandu. Views expressed here are his personal.)

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