Forging a Stronger Social Contract—the IMF’s Approach to Social Spending
IMF News, June 14, 2019
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- Authors: Christine Lagarde
- Published: June 14, 2019
Social Spending—a Key Policy Lever
- Definition: social spending = social insurance, social assistance, and public spending on health and education.
- Core assertions:
- Social spending is a core component of the social contract and must be central to macroeconomic policy discussions.
- Public pensions, health care, and primary and secondary education are vital to well-being, social cohesion, and enabling citizens to reach their potential.
- Inclusive growth underpinned by social spending provides social and political buy-in for growth-supporting policies and builds trust.
- Drivers and challenges motivating greater social spending:
- More retirees, fewer workers.
- The effects of technology on work and wages.
- Rising inequality and demands for greater fairness.
- Barriers to women participating in the economy and realizing their full potential.
- The existential threat of climate change.
- Diminishing trust, rising discontent, and a turn away from global cooperation.
- Public sentiment:
- Surveys indicate rising public support for income redistribution policies in many countries.
- Policy takeaway:
- Social spending is one of the most important levers to respond to complex social and economic challenges and must be treated as macro-critical.
The IMF’s Strategy on Social Spending
- Strategic intent:
- The IMF has published a new strategy on engaging in social spending issues to guide more consistent, higher-quality policy advice and country engagement.
- Empirical findings and analytical points:
- Research shows high inequality can undermine sustained growth.
- Public investment in health and education boosts productivity and growth, and reduces inequality of opportunity and income.
- Social spending programs that redistribute from higher-income to lower-income groups can decrease poverty and inequality and increase household resilience to economic shocks.
- Country-level diagnostics and engagement:
- The IMF brings together 189 of the nations of the world in its work.
- Four out of five IMF mission chiefs view social spending as “macro-critical” in their countries.
- Nearly half view social spending as essential to socio-political stability and investing in people.
- Examples of IMF country engagements:
- Ghana: helped create fiscal space to increase spending on public education to achieve universal secondary education.
- Japan: helped develop options for pension reform in an aging society.
- Cyprus: helped strengthen the social safety net during a severe crisis, including introduction of a new guaranteed minimum income program.
- Jamaica: supported expansion of social assistance programs during a period of belt tightening.
- Fiscal and financing work:
- Technical assistance to help countries raise more domestic revenue nearly doubled between 2010 and 2018.
- Estimated additional spending needed to finance core SDGs (health, education, and priority infrastructure): an extra 15 percentage points of GDP on average for low-income developing countries in 2030.
- Operational principles for IMF assessment and advice:
- Spending adequacy.
- Spending efficiency.
- Fiscal sustainability.
- These yardsticks will be used to assess the “macro-criticality” of social spending.
- Implementation roadmap:
- Over the next year and a half, the IMF will provide more specific guidance to staff underpinned by augmented tools and databases; ongoing analytical work; and background notes on pensions, social assistance, education, and health.
A Partnership for Success
- Rationale:
- Effective social spending policy design and implementation require collaboration across international organizations, academics, country authorities, civil society, and the private sector.
- Consultative process:
- The IMF undertook a broad consultation process in developing the strategy and highlights the value of close engagement with organizations like the ILO.
- Complementary roles:
- The ILO and similar organizations offer significant expertise on social spending that can help IMF teams.
- Civil society, academics, think tanks, and labor unions bring unique perspectives that can enrich IMF analysis and help avoid groupthink.
- Program design principle:
- There is no one-size-fits-all; country preferences, challenges, and long-term aspirations differ and require tailored approaches.
- Ethical and economic imperative:
- The IMF frames the obligation to the poor and vulnerable—and to achieving the Sustainable Development Goals by 2030—as both ethically right and economically sound.
- Closing quote highlighted:
- Franklin D. Roosevelt: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”
By Christine Lagarde, Managing Director, IMF — Geneva, June 14, 2019.