UNICEF ECUADOR:Analysis of Social

Spending in the 2004 Draft Budget

UNICEF ECUADOR:Analysis of Social

Spending in the 2004 Draft Budget

October 2004

ContentContent• Evolution of the Project• Background:

– Social debt– Budgetary Restrictions 1: the Law on Fiscal Responsibility and Transparency– Budgetary Restrictions 2: Pre-assigned income– Macro-economic assumptions

• The 2004 Draft Budget (Proforma) – Income– Expenditures– Debt Service– Trends

• Recommendations for the 2004 Draft Budget• Strategic objectives for Ecuador• New meta analysis

Evolution of the Project

Evolution of the Project

Evolution of the Project

Evolution of the Project• 1980s: Debt crisis in region: the Lost Decade

• 1987-95: Adjustment with a Human Face• 1998-99: Banking crisis in Ecuador• 2000: Socio-economic crisis (doubling of poverty),

indigenous uprising, coup attempt, dollarization– early 2000: UNICEF concerned about impact of crisis on children:

social spending– June-July: 2000: UNICEF agreement with Min. Finance/Economy

to access database– Sept.-Nov. 2000: UNICEF analyzes social expenditure and

presents to Ministries, Congress, etc.

• 2001-2003: continuation/expansion of project• 2002: project replication in Paraguay, Argentina, Mexico?• 2003: presentations in HQ and global Human Rights

Programming workshop

Social DebtSocial Debt

Poverty, educational statistics and child labour all worsen

Poverty, educational statistics and child labour all worsen

• 68% of children in Ecuador live in poverty (83% in rural areas and 82% in the Amazon)

• Primary school enrolment has stagnated at 89% since 1989, and middle school at 44%

• 12.6% of children work (18% in rural areas and 17% in the Amazon)

UNICEF Ecuador’s Index of Child Rights rates the fulfilment of child rights in Ecuador at only 4 on a scale of 10

Budgetary Restrictions 1: the

Law on Fiscal Responsibility and

Transparency

Budgetary Restrictions 1: the

Law on Fiscal Responsibility and

Transparency

Why a Law on Fiscal Responsibility and

Transparency?

Why a Law on Fiscal Responsibility and

Transparency?•Budgetary instability•High and increasing public

debt •Low quality of spending and

little accountability•Absence of citizen

monitoring

Elements of the Law:Elements of the Law:• Limit on deficit: 3.5% + inflation, • Limit on public debt: 40% of GDP, 100% of

income)• Income pre-assigned to pay external debt • Reduced variability of income and expenditures • Extremely limited pre-assignment of budget for

social investment• Introduction of objectives• Introduction of management indicators• Increased public accounting with sanctions• Mechanisms for citizen review and control• Mandated public discussion of the budget

Budgetary Restrictions 2: Pre-

assigned income

Budgetary Restrictions 2: Pre-

assigned income

Total Pre-assignments of Income

Low Social Priority (2003)

Total Pre-assignments of Income

Low Social Priority (2003)% GDP Est. % MilUS$

Total Income (oil & taxes) 23.7 100.0 6.421 Oil 12.0 50.3 3.251

Taxes 11.7 49.7 3.270 Central Govt 16.3 68.9 4.416 Oil 6.4 26.8 1.734

Taxes 9.9 42.0 2.682Social Spending 2.2 9.4 596 Oil 1.1 4.6 298

Taxes 1.1 4.7 298Other recipients 5.2 21.7 1.409 Oil 4.4 18.9 1.219

Taxes 0.7 2.9 190

Social expenditures benefit from only 9% of pre-assigned income, and virtually all of this goes to Universities.

Effects of Fiscal RestrictionsEffects of Fiscal Restrictions

In millions of US dollars

•GROWTH IN PRIMARY SPENDING (excl. interest)

Ceiling: Maximum Growth (3.5% * 4.2%) 7.85%Maximum Primary Expenditure (4.341) 4.681.2Maximum Increase (860) 340.8

•NON OIL DEFICIT/ GDP (29.707)

Ceiling (3,46%) 3.26%Maximum total deficit 968.4

Macroeconomic AssumptionsMacroeconomic Assumptions

NOMINAL GDP (USD $ millions) 29.707.0GDP GROWTH 5-5.5 %DEFLATOR FOR GDP 4.2 %ANNUAL INFLATION 5-6 %OIL PRODUCTION ( MILL.BARR) 192.2 PETROECUADOR 73.5 mill. CONTRACTS ( PARTICIPACION & SERVICES) 118.7 mill. PRICE PER BARREL EXPORTED $18

Vulnerable Growth:For 2002, GDP growth was assumed at 3.5%, but was only 3%For 2003, GDP growth was assumed at 3.5%-4%, but was only -0.3% (1st quarter), -0.7% (2nd quarter) and the projected rate for the year is 2.7%For 2004, the budget is based on a projection of 5.5% (already lower to 4.2% by the Central Bank) - highly vulnerable growth

Social expenditure in the 2004 Draft

Budget (Proforma)

Social expenditure in the 2004 Draft

Budget (Proforma)

TotalExpend.s

5.578(18.8%GDP)

(incluyeIntereses)

US$ millions. Percentages of GDP and total expenditure

TotalIncome

5.051(17% GDP)

New loans2.037

(6.9%PIB) Principal1.510

(5.1%GDP)

The draft 2004 budget

Expend+Principal= Income +Debt. = US$ 7.088 millones

Income tax

600 =8.5%

Other income =3.232=

45.6%

Oil1.219=17.2 %

New loans

2.037=28.7%

Social expend

1.901 26.8%

Non Social

(excl interest)2.77739.2%

Interest900

12.7%

Principal1.51021.3%

2.41034%

4.67866%

Investment is used as the variable of

adjustment

Investment is used as the variable of

adjustment• Public investment is the variable of

adjustment under the fiscal restrictions, given the inflexibility of the budget.

• Social investment decreases even more than overall investment.

Income in the draft budgetIncome in the draft budget

Income: excessive dependence on indirect taxes and oil

income

Income: excessive dependence on indirect taxes and oil

incomeUS$5.051 million

(excl loans)

Of each dollar which enters the Treasury: • 24 cents comes from the oil sector

• 12 cents comes from Income Taxes (individ.s & companies)

• 64 ctvs from Indirect taxes (VAT, ICE, duties) & other income

Fuente: MEF

In dollars:• $1,219 million come from the

oil sector• $600 million come from Income

Taxes (individ.s & companies)• $3,232 million from Indirect

taxes (VAT, ICE, duties) & other income

Tax burden stagnates Non-financial public sector

Tax burden stagnates Non-financial public sector

13.413.713.711.96.4

8.8

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004

En porcentajes del PIB

Tax BurdenFuente:BCE y MEF

2002 -2004 estimaciones

Expenditures in the draft 2004

budget

Expenditures in the draft 2004

budget

Of each dollar of expend.:• 73 ctvs is for

recurrent costs, of which:– 15 cents for debt

interest– 37 cents for

salaries• 27 cents for public

investment

Expenditures: salaries and interest payments absorb more than half

Expenditures: salaries and interest payments absorb more than half

Expenditures are insufficient to promote economic growth (public investment). Salaries and interest on the public debt make up the bulk of the budget (52%).

US$5,578 million

(Sin Amortizaciones)

In dollars.:• $4,072 million are

recurrent costs, of which:– $900 million for debt

interest – $2,027 million for

salaries• $1,506 million for public

investment

Expenditures:Winners and Losers

Educación +72Salud +14Trabajo +2Bienestar Social +38Vivienda +9

Social Sector +135

Non-social sectors +203

Debt Service : +49

Total expenditures grow by US$ 387 million, distributed as follows:

Intereses +36Amortizaciones +13

Sectors with biggest increases:

TotalEducación (salarios) 72Desarrollo Secc. 43 Comunicaciones 41

Sectors with biggest decreases:

TotalDefensa -51.5 Agropecuario - 14.5Asuntos del Exterior - 4.7

Legislativo 8.1Jurisdiccional 15Administrativo 20.8Medio Ambiente 1.4Asuntos Internos 1.9Policía Nacional 13.8Defensa Nacional -51.5Asuntos del Exterior -4.7Agropecuario -14.5Recursos Naturales -3.1Industria y Comercio -2.2Turismo 5Comunicaciones 40.7Otros Organismos 28.8Desarrollo Seccional43

Debt ServiceDebt Service

Payments on the public debt decrease.....

% del PGE

… but debt service remains very high

13 13

22 21

35 34

0

10

20

30

40

Interest Principal Debt

Service

2003 2004

The reduction in the financial debt does not translate into actions to address the social debt

Gasto incluye amortizacione

26.426.8

35 3438 39.5

0

10

20

30

40

Social Debt Non Social

2003 2004

…And reduction in payments does not benefit social sector (%

del PGE)

Trends in Social Spending

Trends in Social Spending

0

200

400

600

800

1000

1200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Educación Salud Bienestar

Vivienda Trabajo TOTAL

Growth in social spending doesn’t benefit all sectors equally...

valores constantes del 2000

Growth in social spending doesn’t benefit all sectors equally...

valores constantes del 2000

… and actually decreases in real terms for Education and Housing

- 8.9

1.2

- 29.6

9.7

58.1

34.2

7.611 9.2

38.8

10.918.5

5.6

16.5

14.6

- 28.7

-40

-30

-20

-10

0

10

20

30

40

50

60

70

1997 1998 1999 2000 2001 2002 2003 2004

Gasto Social Gasto Total

Social spending increases more than total spending...

Social spending increases more than total spending...

…but, the rate of growth decreases significantly compared with previous years.

Tasas nominales de variación anual

RecommendationsRecommendations

Specific Recommendations for the 2004 draft budget

Specific Recommendations for the 2004 draft budget

• Within the budgetary restrictions, defend certain “minimums” for priority social programs– Re-emphasize priority social programs

– Monitor budget implementation with a goal of achieving 95% transfers for the priority social programs and 95% implementation of the amounts transferred

2003 2004• Health

– Plan Ampliado de Inmunizaciones 10.000 5.000– Control y Vigilancia de Enf. Contagiosas

• Dengue 740 908• Tuberculosis 1.353 1.515

– PANN 5.780 1.500– Medicamentos Genéricos 2.450 2.200

• Housing – Vivienda Campesina 4.006 5.978– Vivienda Urbano Marginal 3.000 2.500– Vivienda Bono Solidario 2.000 10.700– PRAGUAS 3.200 5.600

Priority ProgramsPriority Programs

Specific recommendations for the 2004 draft budget: Specific recommendations for the 2004 draft budget:• Prioritize specific Basic Social Services :

– Nutrition programs for children and pregnant women,

– Access, completion and quality in basic education,

– Primary health care, with an emphasis on preventing diseases, and care for pregnant women

– Basic water and sanitation for all, with the participation of Municipalities and communities

Specific recommendations for the 2004 draft budget: Specific recommendations for the 2004 draft budget:

– Improve mechanisms for transparency:•information must be timely to

evaluate the composition, quality and relevance of Social Expenditure.

•Ensure citizen monitoring of the budgets assigned for basic social services

Strategic objectivesStrategic objectives

Social investment per capita in Latin America

Social Spending Percápita 1998-1999

1997 Dollars

16871539

1011827

642622

402381

313192

168135132

115107

825757

540

0 500 1000 1500 2000

ArgentinaUruguay

BrasilChile

PanamáCosta Rica

MexicoColombia

VenezuelaPerú

BoliviaD.R.

ParaguayEcuador

GuatemalaEl SalvadorNicaraguaHonduras

Latin America

• With the restricted growth imposed by the Law on Fiscal Responsibility and Transparency,

• And the trend in population growth,

•Ecuador will take 47 years to reach the average per capita social expenditure of other Latin American countries of 1999

Key concerns:Key concerns:

• Review the Law on Fiscal Responsibility and Transparency, and move towards a Law on Social Responsibility,

• And re-design the income pre-assignments with a view to prioritizing social investment,

•Which could move Ecuador to the Latin American average for social expenditure in only 8-10 years

An urgent responsibility:

An urgent responsibility:

The financial goal...The financial goal...• Eliminate the big gap of social

investment in Ecuador compared with other Latin American countries with better human development indicators :– 6% GDP for Education (currently 2.8%)– 3% GDP for Health (currently 1.6%)– 2% GDP for early child care (currently 0.3%)– 3% GDP to improve income and

consumption of the poorest of the poor (currently 0.7%)

…To reach the overall goals of:

…To reach the overall goals of:

• All children with 10 years of quality basic education

• All children growing up well-nourished and healthy

• All children growing up in an environment of protection and love

• All children growing living in households with decent incomes

October 2003

Ecuador: Program on the Sustainable

Financing of Social Investment

Ecuador: Program on the Sustainable

Financing of Social InvestmentMedium and Long Term

Preliminary Version

What question does the research intend to

answer?

What question does the research intend to

answer?

What is the sustainable level for medium-term and long-term public social spending and investment in Ecuador and

how can it be financed responsibly?

Main Question

Additional Questions

• How much does the country spend on its people?• Why should priority be given to social investment?• What is the appropriate amount for social investment? • How should targeted social investment be financed?• What is the spending margin permitted by existing fiscal regulations?• What are the new mechanisms and criteria for appropriations?• How can the quality of social investment be improved?

Why should priority be given to social investment?

Why should priority be given to social investment?

• Baseline analysis: sample from various countries and cross-section analysis

• Functional form:– Reduction of illiteracy as a function of

spending in education and other determining factors of economic growth.

– Life expectancy at birth as a function of spending in health and other determining factors.

(Source: Barro, Sala-i-Martin...)

Why should priority be given to social investment?

Why should priority be given to social investment?

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2.0 4.0 6.0 8.0 10.0 12.0 14.0Gsocial(-10)

%

Analf

50.0

55.0

60.0

65.0

70.0

75.0

80.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Gsocial(-10)

ExpVida

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Gsocial(-10)

%PIBpc

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0Gsocial(-10)

LogPIBpc

Education Health

Growth Productivity

Why should priority be given to social investment?

Why should priority be given to social investment?

• A one-point rise in social spending for education, as a percentage of GDP, reduces the illiteracy rate by an average of 0.4 point in the world.

• A one-point rise in social spending for health, as a percentage of GDP, increases life expectancy by an average of 1.6 years in Latin America.

• A 4.5-point reduction of the illiteracy rate and a 6-year rise in life expectancy lead to an additional 1.3-point increase of real growth of GDP in the world.

What is the desired amount of social

investment?

What is the desired amount of social

investment?• Ecuador is among:

– 40% of the countries with the highest illiteracy rate

– 40% of the countries with the lowest life expectancy

– 10% of the countries with the lowest social spending

(Source: World Bank, 1999-2001)

Resource GapResource Gap

• In order to provide it with sufficient, ongoing, secure resources, the following funding sources have been considered for the FDH: – A pre-allocation equivalent to 80% of the value-added tax and

income tax, to obtain stable, ongoing, and secure resources – The yields from the current Solidarity Fund, – The elimination of household gas subsidies– 40% share of the FEIREP (rather than the current 10%)– 40% share of the Oil Stabilization Fund (FEP) – 10% share of non-tax income of Sectional Governments – 25% income tax donations – 2% of FODESEC– The income from the self-management of social institutions and

organizations

Conclusions/Lessons Learned

Conclusions/Lessons Learned

• need to avoid “child” budgets, but rather use child rights (and/or women’s rights) as a measure of socially responsible or human development budgets

• budget processes are intensely political – UNICEF/UN needs to focus on analysis and moral calls

• need to work with partners: line ministries, MEF, Congress, NGOs and civil society

• social ministries compete if they don’t agree a common set of priorities (national social policies), leaving decisions to budget technicians in Ministry of Finance (normally based on “numbers” and not on “people”)

• critical role of UN in helping to build social pact – MDGs or other goals – but lack of “ownership” of international goals

• entry into budget work depends on serious analysis and credibility, but not necessarily “failed state”

• impossible to continue analysis without moving on to tax/income issues and debt issues (at least in LAC)

• issues of corporate social responsibility and understanding/commitment, given heavy impact of private sector with MEF and Congress, esp on tax issues