Forging a Stronger Social Contract—the IMF’s Approach to Social Spending

IMF – “Social Spending”

Forging a Stronger Social Contract—the IMF’s Approach to Social Spending
By Christine Lagarde, Managing Director, IMF
Geneva, June 14, 2019
…The IMF’s Strategy on Social Spending
…Let me now address the IMF’s new strategy on engaging in social spending issues, which is being published today.

As social spending issues have become increasingly important for our members over the past decade, we have significantly stepped up our engagement on inclusive growth and social spending.

For instance, our analysis has found that high inequality can undermine sustained growth. Research has also found that public investment in health and education boosts productivity and growth, and reduces inequality of opportunity and income. Likewise, social spending programs that redistribute from higher-income to lower-income groups can decrease poverty and inequality. They can also increase the resilience of lower-income households to economic shocks—including from demographics, technology and climate—which are expected to become more frequent and disruptive.

At the country level, we found that four out of five IMF mission chiefs—the people who lead our engagement on the ground—view social spending as “macro-critical” in their countries. This is important, because macro-criticality is the quintessential trigger for IMF engagement on all structural issues. And nearly half view social spending as essential to socio-political stability and investing in people.

For all these reasons, we have stepped up our engagement on social spending at the country level. For example, we helped Ghana create the fiscal space to increase spending on public education—so that it can achieve its goal of universal secondary education. We helped Japan develop options for pension reform, so necessary in an aging society. In Cyprus, we helped the government strengthen the social safety net during a time of severe crisis—including with the introduction of a new guaranteed minimum income program. Likewise, in Jamaica we supported the expansion of social assistance programs during a period of belt tightening.

In all of our programs, protecting the poor and vulnerable is now, and will continue to be, a core objective.

At the same time, we are providing technical assistance to countries to help them raise more domestic revenue—support in this area nearly doubled between 2010 and 2018. And we estimated the additional spending needed to finance core SDGs—health, education, and priority infrastructure. We found that this requires an extra 15 percentage points of GDP on average for low-income developing countries in 2030.

It is clear, then, that social spending is not just an expense, but rather the wisest of investments in the well-being of our societies. Expansion of access to education and health generates broader productivity gains across the population, allowing all citizens to flourish. To reap the rewards of a stronger global economy tomorrow, we must begin by strengthening social programs today.

But at the same time, we cannot play the role of Pangloss. In the real world, the best of intentions run up against the firmest budget constraints.

So how do we move forward? We must start from the premise that social spending needs to be adequate, yet also efficient and financed sustainably. Spending adequacy. Spending efficiency. Fiscal sustainability. These are the yardsticks we will use to assess the “macro-criticality” of social spending.

We expect this new strategy to lead to more effective IMF engagement on social spending issues, and to strengthen the quality and consistency of our policy advice. It collects best practices gleaned from years of engagement on social spending issues and lays out a clear road map for consistently applying these best practices to our engagement.

Over the next year and a half, we will flesh out the strategy by providing more specific guidance to our staff underpinned by augmented tools and databases; ongoing analytical work; and background notes on issues such as pensions, social assistance, education, and health.

Our strategy should ensure that our engagement is more consistent and hopefully more effective—and also better tailored to our members’ specific preferences and circumstances…