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

This analysis delves into Ecuador's 2004 Draft Budget, outlining social debt, budgetary restrictions, macro-economic assumptions, trends, and recommendations. It covers the evolution of the project, historical context, and the impact on child welfare.

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

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  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. 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

  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. Total Pre-assignments of IncomeLow 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 2.682 Social Spending 2.2 9.4 596 Oil 1.1 4.6 298 Taxes 1.1 4.7298 Other 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.

  12. 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 deficit 968.4

  13. 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

  14. Social expenditure in the 2004 Draft Budget (Proforma)

  15. Socialexpend 1.901 26.8% Non Social (excl interest) 2.777 39.2% Interest 900 12.7% Principal 1.510 21.3% Total Income 5.051 (17% GDP) Income tax 600 =8.5% Other income =3.232= 45.6% Oil 1.219=17.2 % New loans 2.037=28.7% Total Expend.s 5.578 (18.8%GDP) (incluye Intereses) 4.678 66% 2.410 34% New loans 2.037 (6.9%PIB) Principal 1.510 (5.1%GDP) The draft 2004 budget Expend+Principal= Income +Debt. = US$7.088 millones US$ millions. Percentages of GDP and total expenditure

  16. 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.

  17. Income in the draft budget

  18. Income: excessive dependence on indirect taxes and oil income US$5.051 million (excl loans) • 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 • 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

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

  20. Expenditures in the draft 2004 budget

  21. Expenditures: salaries and interest payments absorb more than half 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 • 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 areinsufficient to promote economic growth (public investment). Salaries and interest on the public debt make up the bulk of the budget (52%).

  22. Expenditures:Winners and Losers Total expenditures grow by US$387 million, distributed as follows: Social Sector +135 Debt Service : +49 Educación +72 Salud +14 Trabajo +2 Bienestar Social +38 Vivienda +9 Intereses +36 Amortizaciones +13 Sectors with biggest increases: Total Educación (salarios) 72 Desarrollo Secc. 43 Comunicaciones 41 Non-social sectors +203 Legislativo 8.1 Jurisdiccional 15 Administrativo 20.8 Medio Ambiente 1.4 Asuntos Internos 1.9 Policía Nacional 13.8 Defensa Nacional -51.5 Asuntos del Exterior -4.7 Agropecuario -14.5 Recursos Naturales -3.1 Industria y Comercio -2.2 Turismo 5 Comunicaciones 40.7 Otros Organismos 28.8 Desarrollo Seccional 43 Sectors with biggest decreases: Total Defensa -51.5 Agropecuario - 14.5 Asuntos del Exterior - 4.7

  23. Debt Service

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

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

  26. Trends in Social Spending

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

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

  29. Recommendations

  30. 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

  31. Priority Programs 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

  32. 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

  33. 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

  34. Strategic objectives

  35. Social Spending Percápita 1998-1999 1997 Dollars Latin America 540 Honduras 57 57 Nicaragua 82 El Salvador Guatemala 107 Ecuador 115 132 Paraguay 135 D.R. Bolivia 168 Perú 192 313 Venezuela Colombia 381 Mexico 402 Costa Rica 622 642 Panamá Chile 827 Brasil 1011 Uruguay 1539 1687 Argentina 0 500 1000 1500 2000 Social investment per capita in Latin America

  36. Key concerns: • 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

  37. An urgent responsibility: • 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

  38. 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%)

  39. …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

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

  41. What question does the research intend to answer? Main Question 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? 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?

  42. 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...)

  43. Why should priority be given to social investment? Health Education Growth Productivity

  44. 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.

  45. 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)

  46. 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

  47. 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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