Financing Social Policy
Content
- Introduction
- What Determines Public Spending?
- Social Sector Expenditure In India
- Financial Devolution In India
- Conclusion
Introduction
To address challenges of poverty, declining working and living standards, lack of shelter, poor health and educational achievement, and income and food insecurity, adequate financial investment in social protection measures is required. Taxation, social insurance, foreign aid, and self-provisioning are just a few of the public and private sources that can provide money for social programmes. The ability of a country to create income and its economic performance, as well as its political resolve to invest in social policy, determine the availability of resources to support social programmes.
This blog will teach you about the methods used to finance the social sector in India. We'll talk about historical patterns in social sector spending, particularly allocations made in accordance with five-year plans. There will also be discussion on the Finance Commission's role in revenue allocation, the division of tax revenues between the federal government and the states, financial devolution, and its potential impact on expenditure in the social sector.
What Determines Public Spending?
The availability of cash and policy priorities decide which public resources are allocated to social policy. Government spending on social services is also based on the division of labour that exists between the state, the market, and households. The share of public social spending in GDP that is expressed tends to increase as the country's income does. Compared to low-income countries, high-income countries often spend more. However, the size of public spending is frequently determined by governmental priorities rather than national revenue. For instance, Sweden spends 30% of its GDP on social services and social safety, compared to only 16% in the United States. Self-provision, user fees, pre-paid plans, generalised insurance, indirect taxes, earmarked taxes, and direct taxes are among the forms of financing that are typically utilised to finance social sector initiatives. Based on their distributional impacts, such as whether they are progressive, neutral, or regressive, these instruments can be evaluated (UNRISD 2010, Delamonica and Mehrotra 2008). A measure of progressivity is the proportion of a person's income that goes toward paying taxes. For instance, if both the wealthy and the poor contribute 10% of their salaries to taxes, the wealthy are paying a higher percentage since their incomes are higher. However, because each makes a 10% contribution, the taxation is equal. Rich people must pay a bigger percentage of their income in taxes in order for taxation to be progressive. Regressive taxation is when the rich pay a lower percentage of their income in comparison to the poor, even though the poor paid a higher amount in taxes (Delamonica et al 2008).
Financial instruments that are more advanced are recommended for any degree of resources. The solidarity strategy is referred to as a second method of financing social policy. A healthy individual may contribute to a generalised insurance system, which will use this payment to guarantee that any individual who is now ill receives healthcare. The "solidarity method" involves taxation as a means of funding social services.
The two principles of progressivity and solidarity can be used to categorise all of the various financing techniques that have thus far been discussed. Self-provision and user fees are two examples of the instruments that are deemed to be the most regressive and to foster the least solidarity. Direct taxes are the most solidarity-creating and least regressive tools. The wealthiest will pay more than the poor under a direct tax system that is progressive and effective.
Inter- and intra-sectoral re-allocation of public finances is advised by some analysts in order to boost the availability of public resources for social protection and basic services. For instance, the weight of debt servicing and defence spending on many nations' budgets could be transferred to the social sector. While in some circumstances pro-poor social policies can better address disputes, military spending has recently surged in many of South Asia's poorer nations. Governments also bear a heavy burden of servicing external debt.
Intra-sectoral allocation in areas such as health and education maybe biased towards higher level of services. As a consequence primary education, basic healthcare, water and sanitation in rural areas maybe neglected as rural poor have less political voice than urban better off users of public services. If overall allocation in social sector can be increased by inter-sectoral re-allocation, then, intra-sectoral shifts in health and education may become more acceptable by the general population.
Tax revenues in emerging nations come from three different sources. These include direct taxes, import tariffs, and domestic taxes on products and services (sales tax, excise tax) (corporation and individuals). Self-provisioning is one of the most regressive methods of funding social services or social protection in high-income nations, accounting for the biggest amount of domestic tax on goods and services and income tax from individuals. It comprises unpaid caregiving, asset sales, debt accumulation, and an increase in paid work. High out-of-pocket expenses are required when using user fees or cost sharing. User fees had negative effects on equity when these instruments were advertised in the 1980s and 1990s. Reduced levels of utilisation were reported among the poorer populations who most urgently require these services. User payments should be replaced by pre-paid plans or private insurance. Insurance programmes that need monthly contributions may have a less equitable effect and be more expensive for low-income earners in countries where individuals are primarily employed in the informal sector with insecure jobs and lower income. In such cases where affordability is a concern, state subsidies and public insurance may be more useful. Regressive rather than progressive indirect taxes are those imposed on commerce, specific products, or consumer goods and services. Essentially, this is because women and lower income groups may spend a bigger percentage of their income on these goods and services. Theoretically, one option to make this method more neutral or progressive is to tax luxury items more heavily while exempting basic commodities from taxation. The most equitable method of raising funds for social policy is through direct taxation. If there are no exemptions for high-income earners, this is especially true. Direct taxes only make up a relatively modest amount of the revenue in developing nations. Direct taxes is problematic due to the higher proportion of agricultural and unofficial economic activity. Poor contributions are also a result of tax avoidance. However, more adherence to tax regulations is necessary to increase the effectiveness of this technique (UNRISD 2010).
Social Sector Expenditure In India
In the context of India, all spending that falls under the headings of social services and rural development belongs to the social sector. Education, health, family welfare, access to clean water, and sanitation are all included under the Social Services heading. Rural Development was where anti-poverty programme expenses were placed (Mooij and Dev 2004). Three methods of calculating social sector spending are suggested by the authors: a. as a percentage of GDP; b. as a proportion of total government spending; and c. as actual per capita social spending (ibid). According to the table below, India spent between 6 and 8% of its GDP on social programmes throughout the specified period. In comparison to the 1990s, social sector spending as a proportion of GDP was higher in the 1980s (ibid). However, social sector spending has increased in the post-reform period as a proportion of total spending (column 2 below) and per capita spending (column 3). At the federal and state levels, spending under the heading of rural development decreased (ibid)
The social sector is financed by income, capital gains, foreign loans, and grants. In the context of India, there are no specifically designated taxes to fund the social sector. The 1990s saw a rise in international grants for social sector programmes (ibid). Direct tax revenue receipts have increased over the same time period, as has their proportion of overall revenue receipts. With the launch of new social sector programmes in rural public works (NREGS) and health starting in 2001, social sector allocations rose (NRHM). Increased budgetary support, education cess (Sarva Shiksha Abhiyan and Mid-Day Meal Program), and foreign borrowings were used to pay for these social programmes (Mukherjee 2009).
Up until recently, the so-called Plan expenditure was where the social sector's spending came from. New strategies, techniques, and financial resources were developed every five years. Plan allocations were used to make grants in aid to the states and union territories for their plan expenses. Five-year plans were used to create annual plans, and funding allocations were negotiated. Non-Plan expenses were required by the government and accounted for a bigger portion of revenue. After the 12th plan's tenure expires in 2017, the age of government development planning, priority setting, and financial allocation through five-year plans will come to an end. The first five-year plan was created in 1951. Future budgets will likewise no longer distinguish between plan and non-plan components.
Financial Devolution In India
The distribution of financial resources and the division of tax income between the Center and the State are major responsibilities of the Finance Commission. Additionally, it establishes the framework for giving grants to local and state governments. Article 280 of the Indian constitution established the Finance Commission. Increasing the state's share of tax revenues from 32 to 42 percent was one of the 14th Finance Commission's main proposals. 1 (Kapur et al. 2017; FFC 2015) In 2015–16, the Government of India's Ministry of Finance allocated Rs. 5,06,000,000,000 for tax devolution. This amount exceeded the 3.38 trillion rupees in 2014–15. (ibid).
The president of India appointed the 14th Finance Commission in 2013, with the goal of advising on a few facets of the center-state fiscal interaction. In order for urban and rural local authorities to carry out their legislated duties and provide essential services, the FFC suggested ensuring that monies are transferred to them on a regular basis. The FFC calculated the total amount of the grant for the 2015–20 term that would be given to the local entities. A baseline grant (90 percent of the total in the case of panchayats and 80 percent of the total funds in the case of municipalities) and a performance grant would make up the Grant in Aid (10 percent in case of panchayats and 20 percent in case of municipalities). The primary goal of the unconditional is to improve the provision of the fundamental services specified in the FFC guideline. The grants would be given to the State government by the Central Government in two instalments. Within 15 days of receiving grants, state governments are required to distribute funds to local organisations. The FFC's detailed guidelines provide a variety of recommendations to help local governments "increase revenue from their own sources," including collecting tax and non-tax receipts, collecting rent from shared resources, sharing mining royalties, and instituting service fees (FFC Guidelines).
The principal method of social sector spending, Centrally Sponsored Schemes (CSS), was reduced as a result of increased decentralisation. Following the devolution of taxes and an increase in state awards, a recent study by CPR aimed to determine the situation of social sector spending at the state level (Kapur, Srinivas and Choudhury 2017). Increased tax devolution is anticipated to have a variety of significant effects on state finances. Most states received a larger portion of "untied" monies from the Union Government following the FFC award. According to the CPR study, some states got more tied or untied money after the devolution. However, after devolution, spending on centrally sponsored schemes (CSS), which make up the majority of social sector spending, was also reduced. Examples include: Sarva Shiksha Abhiyan (Education), National Rural Health Mission (Health), and Integrated Child Development Scheme (Maternal and Child Nutrition). The justification being that the enhanced financial (tax) devolution to the states would offset the reductions in CSS (ibid). The Central Government still supported the States through special Central Assistance in spite of the budget cuts. Consequently, the amount of money sent from the federal government to state governments to carry out social sector programmes increased overall in 2015–16. (ibid). The responsibility for funding social sector programmes now falls on the states as regional and local governments gain more authority as a result of the FFC award.
Conclusion
Social policies and the financial tools that enable them are inextricably linked. Resources must be deployed in order to increase and strengthen the fiscal room for social policy. The ideals of equality, efficiency, and democratic accountability should be taken into consideration while formulating expenditure plans for social provisioning. The finest financial tools to support democracy and solidarity are well-designed taxes and social security. You have learned about the methods of financing the social sector in India in this session. It has been explored historical trends in social sector spending, including allocations based on five-year plans. We have made an effort to comprehend the part the Finance Commission played in distributing financial resources and tax revenues between the Center and the State. The module has also emphasised important ideas on financial devolution and potential impacts on expenditure in the social sector.
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