Module 13: Assessing
affordability and impact
on fiscal space
ILO, 2013
Key questions
• What is affordability?
• What is fiscal space?
• How to forecast government revenues and expenditures?
• How to calculate fiscal space and finance fiscal deficit?
• How to convince governments to invest in social protection?
Affordability
• SPF benefits proposed in the ABND exercise may be financed
in many ways, depending on policy choices and the social
model in the country:
– workers’ and employers’ contributions
– government budget
• For contributory schemes, the contributions must be
affordable for workers and employers
• If out-of-pocket payments are required, they should not limit
access to social services
Fiscal space
• Fiscal space is the budgetary capacity of a government to
provide resources, without jeopardizing the sustainability of
its financial position or the stability of the economy
• If budgetary capacity is not sufficient, additional fiscal space
may be created by raising income taxes, value added taxes,
borrowing from international institutions or markets, cutting
down on low-priority expenses
• Borrowing should not compromise macroeconomic
sustainability in the long-term
Forecasting GGO
• Official budget projections or projections made by research
institutes (e.g. TDRI Thailand) should be used
• Based on historical data, government revenues and
expenditures can be forecast:
– Government revenues and expenditures are expressed as
a percentage of GDP at current price for previous years
– It is projected in the same proportion
• When different scenarios of GDP data are available, several
forecasts of government revenues and expenditures may be
made
Forecasting government revenues
Forecasting government expenditures
Calculating fiscal space
• Projected government balance = government revenues government expenditures
• In developing countries, budget balance is usually negative
• Due to GDP growth, the negative balance may progressively
shrink in a few years
• When SPF benefits are introduced, the budget balance
becomes more negative and fiscal space will take longer to
become positive
Forecasting budget balance
Fiscal space after implementing proposed SPF scenarios (as a
percentage of GDP), Thailand
3.0
2.0
BALANCE (in % of
GDP at current
prices) - Status Quo
1.0
0.0
2012 2013 2014 2015 2016 2017 2018 2019 2020
-1.0
BALANCE (in % of
GDP at current
prices) - Low
scenario
-2.0
-3.0
-4.0
-5.0
BALANCE (in % of
GDP at current
prices) - High
scenario
Convincing governments to invest
in social protection
• Simulations and ex ante assessments (e.g. Viet Nam) of the
impact of social protection policies on individual and
household expenditures and poverty status need to be
performed
• Direct effect: When households avail social protection
benefits, their income increases, thus reducing poverty
• Multiplier effect: With higher income, households buy food,
goods and services, thereby generating more income for the
economy
• Behavioural effects: When households use health care and
education services, it leads to better health, higher
productivity, increased human capital
Impact of social protection
Framework of the “Rate of return on investment in social protection”
model
Impact of social protection
Model on the “Rate of return on investment in social protection” in
Cambodia (draft)