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Public finance and development: top reads in April 2023

Written by Tom Hart

See all blogs in our public finance and development series.

Welcome to the April round-up. As we go to press, the IMF/World Bank Spring Meetings are taking place in Washington DC. We’ll bring you the low-down on the meetings in next month’s round-up.

As was the case six months ago, the UK delivered its budget just before the meetings. While current Chancellor Jeremy Hunt will escape his predecessor’s fate of being summoned home early to be fired, his budget highlighted continuing flaws in the UK’s fiscal framework.

Alongside this, we attempt to make sense of IMF debt sustainability analyses (DSAs) and examine the 'financing squeeze' facing many low- and middle-income country governments. We also take a look at the lessons for undertaking fiscal consolidations and round up some recent research on health financing, before finishing with some reflections on what practitioners need from research economists.

Fiscal failure in the UK

The UK has had six sets of fiscal rules since 2014. As the March budget showed, the current set does more to incentivise cuts in investment and fiscal wheezes such as projecting politically unlikely tax rises and announcing ‘temporary’ policy changes than to guide sensible policy. On the first issue, a new Resolution Foundation paper documents that low public investment is a long-standing problem and suggests three reforms to mitigate it: first, changing the fiscal rules to treat investment spending differently from current spending (a current budget target rather than an overall deficit rule) and replacing a debt reduction target with a rising net worth target; second, reducing year-to-year Treasury tinkering with public investment plans by setting multi-year investment levels at the start of each parliamentary term through a Public Investment Act; and third, giving sub-national tiers of government greater control and certainty over their capital budgets. To improve the quality of investment, business cases for major projects should be independently certified and routinely published.

Debt podcasts and puzzles

Ahead of the first formal meeting of the Global Sovereign Debt Roundtable at the Spring Meetings, the latest ODI Think Change podcast – which features Bright Simons, Gregory Smith and my colleague Yunnan Chen – looks at the sovereign debt crisis in the Global South.

Brad Setser asks why the IMF DSAs came to such different conclusions in Sri Lanka and Zambia despite the two countries having similar debt and revenue positions. Sri Lanka’s debt-to-GDP ratio is estimated at 128% in 2022, Zambia’s at 123%. Sri Lanka’s average tax revenues were 12% of GDP in the ten years before the pandemic, and Zambia’s 18%. But the restructuring proposals look quite different: Zambia’s external creditors (i.e. bondholders and Chinese lenders) are being asked to take a significant hit (ca. 50% net present value reduction) to get debt/GDP down to around 65% of GDP by 2027. In contrast, it seems Sri Lanka’s external creditors are not being asked to take nearly as big a hit, and debt/GDP will remain well over 100% by 2028. Setser asks why the application of the two different DSA frameworks (low income for Zambia, market access for Sri Lanka) are leading to such different results. But on a narrowly fiscal basis, the programmes do look quite similar. Both countries are expected to get interest payments close to 6% of GDP by the end of the programme period, compared to previous peaks of well over 7% of GDP, and move into significant primary surpluses at the same time.

Gyude Moore, building on Development Reimagined’s suggestion of a ‘Borrower’s Club’ to increase the leverage of borrowing countries, proposes some principles for a ‘Lusaka Club’ to advocate reforms to debt restructuring frameworks. These principles include preserving the ability of multilateral development banks (MDBs) to borrow and lend cheaply; ensuring that any reforms are an improvement on current arrangements (e.g. if the IMF DSA is criticised, a superior viable alternative must be proposed); and securing MDB participation in debt forgiveness along the lines of the 2005 Multilateral Debt Relief Initiative.

‘A brutal financing squeeze’

The head of the IMF’s Africa Department, Abebe Aemro Selassie, argues that the continent is facing a brutal financing squeeze, which is not yet being treated with the appropriate degree of ‘seriousness and urgency’ by either the international community or the region’s policy-makers. This financing squeeze and the response to it are analysed in Thomas Stubbs et al’s article, ‘The return of austerity imperils global health’. It shows that the IMF currently forecasts that by 2024, public spending as a share of GDP will be lower than the 2010s average for almost half of all low- and middle-income countries. The risk is that cuts to public health service funding coincides with a deterioration in population health due to economic hardship.

Selassie calls for a much higher volume of counter-cyclical flows from the IMF and MDBs, a more effective sovereign debt resolution framework and more aid from high-income countries – or at least aid that is better targeted towards the poorest and most fragile countries. Stubbs et al make similar proposals but also call for greater domestic resource mobilisation, including wealth taxes and action in the financial centres of the Global North to tackle money laundering and capital flight. However, as this CGD blog on health spending and debt concludes, there are limits to how much additional revenue can be raised in the short term, which puts the onus on increased external financing to protect public spending.

Lessons for fiscal consolidation

The absence of external financing means many countries will have to undertake tough fiscal consolidations. A new IMF survey of this issue provides an overview of the evidence across all country income groups, and pays specific attention to distributional impacts as well as growth outcomes. While too many of the findings are a little close to ‘I wouldn’t start from here’ for my liking, there are also some interesting insights on the design of consolidations. The paper finds that most fiscal consolidations improve the primary balance by around 1-2% of GDP per year and last three to four years. It also concludes that gradual and back-loaded consolidations tend to stabilise debt more permanently with more contained output losses. That being said, these strategies are only feasible if the financing is available to do this. The paper also reiterates the importance of protecting social spending and public investment for poverty reduction and long-term growth. If you don’t have time to read the whole thing, the table in the introduction summarising the paper’s key findings is well worth taking a look at.

The politics of ending fossil fuel subsidies

Ending badly targeted subsidies is often touted as a potentially important reform that can create fiscal space for consolidation or other priority spending. Repurposing inefficient subsidies for agriculture and energy could free up $1.2 trillion, according to the World Bank’s High-Level Advisory Group on Sustainable and Inclusive Recovery and Growth. Most of this is likely to be locked up in higher-income countries, but subsidies are also a significant drain on the budgets of lower-income countries. Indeed, removing energy and fuel subsidies is one of the largest fiscal measures in Zambia’s IMF programme. But in many cases, these reforms have failed. In his new book, Ending Fossil Fuel Subsidies: The Politics of Saving the Planet, Neil McCulloch makes the case for a locally driven, flexible approach to these reforms. McCulloch argues that the reforms only succeed where they are shown to be supporting the fulfilment of other important political goals, whether they be energy security, climate change protection, improved air quality or increased social spending.

Adverse findings for health insurance

It has been a bad few months for advocates of health insurance reforms. While many countries consider the introduction of some form of national health insurance as they seek to move closer to universal health coverage, a star-studded line-up of senior WHO and World Bank health economists have dismissed the popularity of this reform as an ‘addiction to a bad idea’ as it tends to lead to inequities and fragmentation in health financing and does not help to increase revenues. Reviewing experience with health insurance over the last 20 years and drawing on survey data from 62 countries, Jishnu Das and Quy-Toan Do’s new working paper (catchily named ‘The Prices in the Crises’) concurs that health insurance does not increase revenue for health spending (as consumers won’t pay for unsubsidised insurance premiums) nor does it enhance quality through patient choice and improved provider reimbursement mechanisms – but it is increasing financial protection. Another recent article by researchers at the Centre for Health Economics at the University of York finds that moving to a government-financed health system instead of a social health insurance-financed system leads to a greater improvement in health outcomes, largely due to the latter system's higher implementation costs and more limited coverage.

Das and Do’s paper argues that the key policy challenge is to identify what specific payment structures and non-price mechanisms can alter provider behaviour and patient choice to improve quality. A new blog offers useful reflections based on last year’s landmark World Bank publication, Improving Effective Coverage in Health: Do Financial Incentives Work? – reflections that are surely applicable beyond the health sector. The impact of performance-based financing depends on the broader system it is embedded in. As the blog argues, ‘performance pay might make sense in decentralized, high-quality health systems that already support facility financing and autonomy, as well as accountability and transparency. [But] in reality, its potential may be more limited in centralized, under-resourced health systems with critical gaps.’

So what are the policy implications? First, health services need adequate public funding – meaning general budget funding rather than contributory insurance. Second, there may be an argument for setting up a health insurance agency as a ‘purchaser of services’ independent from the health ministry if it can do this more flexibly and effectively. But is this worth the candle if the key constraints to better performance are not actually within the control of front-line providers? Rather than creating an agency to facilitate reformed payment structures, is it better to start off by improving financial flows to facilities and looking at demand-side interventions? Setting up a new agency and moving financing functions out of the health ministry is a major reform, and most governments only have limited reform bandwidth. What are the opportunity costs of this reform? Might other reforms be prioritised ahead of this?

PPPs in health: safeguards needed against risks

If health insurance can’t mobilise additional resources, can public-private partnerships (PPPs)? A new WHO paper looks at the lessons for using PPPs for healthcare infrastructure and services in middle-income countries in Europe and Central Asia. A lot can go wrong: PPP projects made an English NHS trust insolvent and swallowed an unsustainable proportion of Lesotho’s health budget, while 28% of Türkiye’s Ministry of Health budget was taken up by just 10 hospital PPPs.

The paper concludes that PPPs provide better post-construction quality and maintenance but higher transaction and financing costs than conventional procurement. It argues that PPPs should only be used to invest in health infrastructure if three conditions are met: the PPP projects are contributing to a prior investment strategy (i.e. the decision to invest in infrastructure is taken prior to deciding whether to do this via conventional procurement or PPP); there is an objective, independently scrutinised assessment of long-term financial costs and risks from PPPs (given the incentive to downplay future costs); and there is strong contracting capacity in government to design, manage and monitor PPPs, ideally in the form of a specialist PPP unit.

Health taxes are a safer bet for increasing revenues than health insurance or PPPs. The World Bank has launched a new Health Taxes Knowledge Note Series, which provides policy-makers with an overview of key issues and feasible policy choices in setting and implementing excise taxes on tobacco, alcoholic drinks and sugar-sweetened beverages for the purpose of both health and revenue gains. The series starts with a primer on health taxes and follows this with a guide on how to deal with inflation in setting health taxes.

What do practitioners need from research?

My former colleague Paddy Carter offers eminently sensible reflections on what needs to be done differently for practitioners to get more out of research. He points to improved reporting of descriptive statistics to help practitioners make comparisons and get a sense of relative magnitudes, practitioner-focused surveys that try to make sense of policy options, and explicitly including a review of unanswered questions in these surveys. It reminded me of this classic 2014 plea from Jeffrey Hammer for development economics to re-embrace old-fashioned public economics to become more policy-relevant, which still merits re-reading.