Financing of and spending on safety nets

Financing of and spending on safety nets

Figure B: Safety Net Expenditures as a Percentage of GDP, Selected Countries and Years

Most developing countries spend 1 to 2 percent of their GDP on safety nets. If countries wish to increase their spending on safety nets, they can reallocate expenditures, raise taxes, obtain aid grants, or borrow. Reallocation of funds from less important items is preferable. If taxes are to be raised, the government must pay attention to the economic and political costs. If international grants are to be used, the government and donors should ensure that funding flows are stable and that procedures are conducive to building capacity. Debt finance is appropriate when programs benefit future generations by raising their productivity and consequently increasing future tax revenues, or during recessions.

Even where safety nets have a place within budgets, they may face financial constraints so tight that policy makers will have to make difficult decisions about how to allocate money insufficient to meet needs. In response, there are three approaches that may be taken in different combinations:

• Keep the role of safety nets small relative to possible needs. Benefits may be limited to only a portion of the poor by defining specific subcategories of individuals, by using an eligibility threshold well below the poverty line, or by only providing seasonal benefits.

• Ensure complementarities with building physical and human capital. This helps the poor survive today and will reduce the causes of poverty in future years.

• In very low-income countries, international assistance may be used to finance social assistance. In fact there is an increasing willingness on the part of donors and countries to use aid in such ways