Public Spending for Poverty Reduction

1. Public Spending for Poverty Reduction Jeni Klugman One Day Workshop on Critical Issues in Public Expenditure Management June 22, 2001

2. Assessing spending options: A simplified framework Whether and where government should spend Step 1 Analytical Tools include: Poverty diagnostics · Determine for rationale for public Distribution of access and spending by: · intervention: - Level of service 1. Market failures, including public - region/rural - urban goo ds, externalities, non - competitive - population group markets Evaluation of selected programs · 2. Address inequalities in access to services and distribution of income Potential Instruments include: Step 2 Þ Regulatory Measures: · e.g. private schooling Decide among alternative · instruments to offset market failures Utility tariffs and universal service obligations and/or improve distributive outcomes Þ Revenue Measures: · Review distributive impact of reve nue measures e.g. reduce taxes on ag. export. Þ Distinguish between public finance and provision · Contract out to private sector · State - run entities & programs Step 3 Meth ods to rank across programs include: Decide on the type of program if cost effectiveness analysis · state - run is chosen, and set priorities multi - criteria analysis · consistent with aggregate budget social cost - benefit · constraints

3. Assessing the distribution of public spending : Why and what • Inform decisions and choice of instrument • All major programs and projects—not just the social sectors (!) • Utilization as well as access • General caveat: investments may have longer term payoffs

4. Data needs • National census or a household survey—income and demographic variables—or service utilization data, or qualitative surveys of users. • Poverty diagnostics are a key building block • Spending by the central and local governments, and projects externally financed, disaggregated by service level or by region.

5. Spending by level of service Source: World Bank, 1993. “Uganda: Social Sectors: A World Bank Country Study” Washington.

6. Regional composition of spending i) Simple breakdowns by province, district ii) poverty map

7. Benefit incidence analysis Conventional (static/ average) approach has three steps: • Estimating unit cost, (subsidy) per person: requires data on capital and recurrent costs; • Imputing the unit subsidy to households (individuals) based on their utilization of the service—usually derived from household surveys; and • Aggregating households (individuals) into groups (e.g. quintiles) and comparing subsidy incidence across these groups. Population can be further broken down by region, ethnic group, or gender.

9. Distribution of marginal benefits of program expansion The current distribution of benefits of spending may not be the same as what would happen with program expansion. Reasons include: • “Capture” by different income groups over time • Remote or inaccessible regions less well-served by current programs • Scaling up may reduce targeting effectiveness • A program that currently benefits mainly the non-poor may still warrant expansion, as the poor may benefit disproportionately from increases in spending levels; or vice versa

10. Estimating marginal benefits Data requirements: • household data to allow calculation of quintile specific participation (e.g. enrolment) rates Approach is to compare average & marginal odds: • Calculate the average odds ratio (defined as the quintile average rate divided by population average rate) • Estimate the marginal odds ratio-defined as the marginal increase in quintile specific rate associated with an aggregate change in overall rate

11. Comparing average and marginal odds: primary education Rural India - (1993 – 4) Ravallion and Lanjow 1998

12. Caveats • Supporting functions may be more important for the poor in the long term • The cost of services is an inadequate proxy for the benefits received • Neglects differences in ability of different social groups to transform access to the service into improved well-being • Neglects differences in the quality of services provided • Government spending does not represent the full cost to users • Results may well be sensitive to assumptions about equivalence and economies of scale

13. Program Evaluations • Rigorous methodology: various statistical techniques for assessing the consequences of a program intervention in relation to what would have occurred in the absence of the program (by using, e.g., control groups). • preferably combined with qualitative and participatory information to understand the underlying processes and constraints • In many countries, however, few if any, rigorous evaluations of any programs have been done • Developing more systematic evaluation strategy with respect to key programs is an important part of a PRSP to inform future resource allocations

14. Assessing options in the short term • Overall fiscal analysis • Program descriptions • Poverty profile • Relationship between program and poverty profile • Preliminary overall evaluation

15. Mapping programs onto poverty profile (Cerea, Brazil)

16. Key relevance to PRSPs (i) Is the financing plan adequate & credible? (ii) Are fiscal choices (expenditure and revenue policies) consistent with strategic priorities and institutional capacity? (iii) Is public financial management adequate to ensure effective implementation? See the JSA Guidelines

17. Costing PRSPs: Burkina Faso • Projected medium-term budget for priority sectors: • Based on existing program budgets from line ministries and MTEF 2001-03 • A financing plan for specific measures in the PRSP. BUT • Only costing of “additional” (relative to existing sectoral programs) activities explicit but of the four priority programs in PRSP (“ Accelerated Growth” and “Good Government”) not costed • For funding sources, only HIPC resources explicit • MTEF presented in very summary form, with a line for the so-called “additional” PRSP expenses.

18. Costing Uganda’s PEAP • Presentation of MTEF, including: • Linkages with the macroeconomic framework; and • Table summarizing sectoral expenditure shares • Discussion and summary table of institutional Poverty Action Fund (PAF) a subset of the MTEF. But: • Sources of funding are not clearly identified. • Annex table on “Goals, targets and indicators in the PEAP 2000” presents partial costing for achieving specific

19. Cambodia’s draft SEDP(PRSP) • Every sector presents a "wish list"  • No clear presentation of a forward-looking budget.  • The PIP (including "high priority projects") is presented, but: – recurrent cost implications ignored. – need to link the PIP to a medium-term framework of resource mobilization is recognized, but no explicit work plan for how this is to be achieved. – unrealistic external financing envelope: PIP was 50% unfunded. – PIP presents sectoral allocations only within infrastructure. 

20. Conclusions 1. Improving the quality of expenditure analysis • asking the right questions at key stages in the budget cycle – about the rationale for spending, and its distributive impact • good poverty diagnostics—both quantitative and qualitative • Complementarity of different data and techniques to examine the distributional impact of spending • Fundamentally linked to basic principles of good public sector financial management, including comprehensiveness, medium term perspective and transparency