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UNICEF ECUADOR: Analysis of Social Spending in the 2004 Draft Budget October 2004.

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Presentation on theme: "UNICEF ECUADOR: Analysis of Social Spending in the 2004 Draft Budget October 2004."— Presentation transcript:

1 UNICEF ECUADOR: Analysis of Social Spending in the 2004 Draft Budget October 2004

2 Content 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

3 Evolution of the Project

4 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

5 Social Debt

6 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

7 Budgetary Restrictions 1: the Law on Fiscal Responsibility and Transparency

8 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

9 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

10 Budgetary Restrictions 2: Pre-assigned income

11 Pre-assigned Oil Income % GDPEst. % 3. Gross oil income11.9100 Exports5.646.9 Cental govt4.033.8 Universities (80% ESPOL)0.10.5 Others1.512.6 Domestic sale of derivatives6.353.1 Central govt2.319.6 Petroecuador4.033.5 The Central Government receives 53.4% of oil income, 53 cents for every dollar of income, but spends only 1 cent for social investment

12 Pre-assigned Tax Income % GDPEst. % Gross tax income11.8100.0 VAT6.8100.0 Central Govt6.088.0 Fopedeupo y Univ. Agraria0.710.5 Others0.11.5 Income tax2.4100.0 Central Govt1.771.5 Universidades estatales y Partic.0.211.0 Others0.511.5 Customs duties1.8100.0 Central Govt1.792.0 Others 0.18.0 Taxes on luxury consumption (ICE)0.8100.0 Central Govt0.558.3 Mat. Grat. y Equip. Hospitalario0.219.4 Others0.122.3 Social investment receives 10.5% of the VAT, 11% of income taxes and 19% of the ICE

13 Total Pre-assignments of Income Low Social Priority (2003) % GDPEst. %MilUS$ Total Income (oil & taxes)23.7100.06.421 Oil12.050.33.251 Taxes11.749.7 3.270 Central Govt16.368.94.416 Oil6.426.81.734 Taxes9.942.0 2.682 Social Spending2.29.4596 Oil1.14.6298 Taxes1.14.7 298 Other recipients5.221.71.409 Oil4.418.91.219 Taxes0.72.9 190 Social expenditures benefit from only 9% of pre-assigned income, and virtually all of this goes to Universities.

14 Effects 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) 4.681.2 Maximum Increase (860) 340.8 NON OIL DEFICIT/ GDP (29.707) Ceiling (3,46%) 3.26% Maximum total deficit968.4

15 Macroeconomic Assumptions NOMINAL GDP (USD $ millions) 29.707.0 GDP 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

16 Social expenditure in the 2004 Draft Budget (Proforma)

17 Total Expend.s 5.578 (18.8%GDP ) (incluye Intereses) US$ millions. Percentages of GDP and total expenditure Total Income 5.051 (17% GDP) New loans 2.037 (6.9%PIB) Principal 1.510 (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% Oil 1.219=17.2 % New loans 2.037=28.7% Social expend 1.901 26.8% Non Social (excl interest) 2.777 39.2% Interest 900 12.7% Principal 1.510 21.3% 2.410 34% 4.678 66%

18 Income: increased debt, decreased oil income 2003 2004 US$% GDPEst. %US% GDPEst. % Total income5.02218.574.95.05117.071.3 Oil1.4815.522.11.2194.117.2 Income tax5221.97.8 6002.08.5 Other income3.01911.145.13.23210.945.6 New loans 1.6796.225.12.0376.928.7 Income+New loans6.70124.7100.07.08823.9100.0 Aumenta la participación de la deuda en el financiamiento del PGE y se reduce el financiamiento con base a ingresos petroleros. El envío de crudo por el OCP merma recursos actuales del Gobierno Central

19 Expenditures: Social investment stagnates 2003 2004 US$% GDPEst. %US% GDPEst. % Total Expend.5.20419.277.75.57818.878.7 Social1.7676.526.41.9016.426.8 Non Social2.5739.538.42.7779.339.2 Interest8643.212.99003.012.7 Principal1.4975.522.31.5105.121.3 Deficit-182-0.7-2.7-527-1.8-7.4 Expend +Principal6.70124.7100.07.08823.9100.0 As in 2003, social investment stagnates as a priority while the deficit increases significantly.

20 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.

21 Income in the draft budget

22 Income: excessive dependence on indirect taxes and oil income US$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

23 Income: continuing structural problems Income structure shows:i) high vulnerability of income due to dependence on oil; ii) low tax income and low redistributive effect of the budget due to the low weight of the Income Tax and the high weight of indirect taxes.

24 Tax burden stagnates Non-financial public sector Fuente:BCE y MEF 2002 -2004 estimaciones

25 Expenditures in the draft 2004 budget

26 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 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

27 Expenditures:Winners and Losers Educación +72 Salud +14 Trabajo +2 Bienestar Social +38 Vivienda +9 Social Sector +135 Non-social sectors +203 Debt Service :+49 Total expenditures grow by US$ 387 million, distributed as follows: Intereses +36 Amortizaciones +13 Sectors with biggest increases: Total Educación (salarios) 72 Desarrollo Secc. 43 Comunicaciones 41 Sectors with biggest decreases: Total Defensa -51.5 Agropecuario - 14.5 Asuntos del Exterior - 4.7 Legislativo8.1 Jurisdiccional15 Administrativo20.8 Medio Ambiente1.4 Asuntos Internos 1.9 Policía Nacional13.8 Defensa Nacional-51.5 Asuntos del Exterior-4.7 Agropecuario-14.5 Recursos Naturales-3.1 Industria y Comercio-2.2 Turismo5 Comunicaciones40.7 Otros Organismos 28.8 Desarrollo Seccional43

28 Debt Service

29 Payments on the public debt decrease..... % del PGE … but debt service remains very high

30 The reduction in the financial debt does not translate into actions to address the social debt Gasto incluye amortizacione …And reduction in payments does not benefit social sector ( % del PGE)

31 Trends in Social Spending

32 Growth in social spending doesn’t benefit all sectors equally... valores constantes del 2000 … and actually decreases in real terms for Education and Housing

33 Social expenditure continues to grow... valores corrientes … But at a much slower pace.

34 Social expenditure: a stagnating priority... … not yet achieving even the priority it had in 1996, either as a percentage of the budget or as a percentage of GDP. Gasto incluye amortizaciones

35 Education increases as a percent of the Social Sector... Estructura por Sectores … But this is exclusively due to salary increases, and Health and Social Welfare actually decrease.

36 Social spending increases more than total spending... …but, the rate of growth decreases significantly compared with previous years. Tasas nominales de variación anual

37 Recommendations

38 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

39 Priority Programs (May 03)

40 20032004 EDUCATION –Redes Amigas12.56110.000 –Mejoramiento Educ. Intercul. Bilingüe 2.189200 –Ecuador Educa 5002.100 –Programa de Alimentación Escolar18.65529.655 SOCIAL WELFARE –Bono de Desarrollo Humano197.207 200.000 –Gerontología1.6002.040 –ORI26.80831.772 –Nuestros Niños19.9068.600 –PROLOCAL 7.3484.500 –PRODEPINE 5.4513.393 –Seguro Social Campesino10.36210.534 Priority Programs

41 20032004 Health –Plan Ampliado de Inmunizaciones 10.0005.000 –Control y Vigilancia de Enf. Contagiosas Dengue740908 Tuberculosis1.3531.515 –PANN5.7801.500 –Medicamentos Genéricos2.4502.200 Housing –Vivienda Campesina4.0065.978 –Vivienda Urbano Marginal3.0002.500 –Vivienda Bono Solidario2.00010.700 –PRAGUAS3.2005.600 Priority Programs

42 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

43 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

44 Strategic objectives

45 Social investment per capita in Latin America Social Spending Percápita 1998-1999 1997 Dollars 1687 1539 1011 827 642 622 402 381 313 192 168 135 132 115 107 82 57 540 0500100015002000 Argentina Uruguay Brasil Chile Panamá Costa Rica Mexico Colombia Venezuela Perú Bolivia D.R. Paraguay Ecuador Guatemala El Salvador Nicaragua Honduras Latin America

46 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:

47 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:

48 Protect social spending giving it more priority within social spending Revise the pre-assignments of oil and tax income in favor of social spending Define critera for pre-assignments of income Improve the efficiency and quality of social spending: –Increase investment within social spending –Improve equity and transparency An urgent call: a law on Social Responsibility

49 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%)

50 …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

51 October 2003 Ecuador: Program on the Sustainable Financing of Social Investment Medium and Long Term Preliminary Version

52 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?

53 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...)

54 Why should priority be given to social investment? Education Health GrowthProductivity

55 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.

56 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)

57 Resource 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

58 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

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