Blind Budgets: How governments hide the impact of fiscal policies on poverty and inequality (and what they could do instead)

by Paolo de Renzio, International Budget Partnership— Aug 28, 2020

One of the key questions ordinary citizens ask about government budgets is “how will it affect me?” This is a particularly important question for people who live in poverty or are part of disadvantaged and marginalized groups. For them, how much tax they pay or what public services they receive can make the difference between deprivation and well-being. This is even more relevant during times of crisis like the COVID-19 pandemic, when poverty and inequality worsen, and governments are called on to provide assistance to those most in need.

The World Bank estimates that the COVID-19 pandemic is likely to push between 71 and 100 million people into extreme poverty by the end of 2020. Other estimates put the global tally at around half a billion people, and the likelihood of reversing recent gains in reducing global poverty all but certain. Inequality was already on the rise before COVID-19, and the pandemic will likely make the gap bigger, in rich and poor countries alike. The virus magnifies pre-existing differences in economic and social conditions by disproportionately disrupting the livelihoods of those at the lower end of the income scale who cannot self-isolate, have less job security and are more exposed to possible contagion.

Therefore, it is critical to understand how governments are providing the public with adequate information about the impact of budget policies on poverty and inequality to tackle these social ills.

We started looking at this issue in a brief published in early 2019, which used data from the 2017 Open Budget Survey to show that most governments publish very limited information on these topics. The information that is made available, our research showed, is often scattered and incomplete, and reporting back on implementation of relevant budget policies is weaker still.

Unfortunately, the results of the 2019 Open Budget Survey show little improvement, if any.

For people and organizations interested in knowing what policies governments are putting in place to reduce poverty, the annual budget proposal prepared by the executive is the first place to look. However, only less than half of the governments in our survey that publish such a document present information on funds allocated to those policies—and only about a third explain what the numbers actually mean. Among these, here are some interesting examples:

  • In Thailand, the Budget in Brief document includes details about one of the guiding strategies for the government’s 2019 budget, called “Poverty alleviation, inequality reduction and internal growth creation,” through which resources are allocated to areas such as social protection, health insurance and old age pensions.
  • Rwanda’s Budget Framework Paper brings together information on government interventions for the “Social Transformation Pillar”—which includes as one of its objectives a “poverty free Rwanda”—ranging from eradicating malnutrition to improving access to health and education services.
  • New Zealand introduced a new Well-Being Budget approach which links public spending to a series of well-being indicators, focusing government action on priority areas such as addressing child poverty and improving the living conditions of the Māori population.

Monitoring how those funds are spent is even more difficult, with less than a fifth of governments including detailed reporting on pro-poor policies in their year-end reports. In South Africa and Brazil, governments publish detailed reports on the actual spending and performance of various programs related to poverty reduction, even though these are not compiled in an easy-to-access manner.

In order to understand how public spending affects vulnerable groups (i.e. women, the elderly, ethnic minorities, etc.)—and therefore what impact it has on inequality across various dimensions—the budget proposal needs to provide information organized for that specific purpose. Unfortunately, only about a third of the budget proposals analyzed in our survey include such alternative displays of expenditure. The finance ministry in Bangladesh, for example, has regularly published gender budgets and child budgets as part of its budget proposal. And in Ecuador, the medium-term budget programming document includes tables that summarize spending aimed at “closing equity gaps” along various dimensions, including gender, disability, age groups, etc.

In summary, many governments do not seem to consider their budgets’ impacts on poverty and inequality as something worth explaining or reporting on, keeping citizens in the dark. In fact, they do not seem to consider the needs and opinions of vulnerable and marginalized groups as relevant in the budget process at all. Out of 117 countries covered in our survey, just half (56) offer opportunities for citizen engagement during budget formulation. Among these, only six make some effort to include vulnerable groups in those discussions. The situation is even worse during budget execution, with only one government out of 31 making a similar effort. Interesting examples include countries like India and Zimbabwe, where finance ministries hold pre-budget consultations where representatives of disadvantaged groups are invited to participate and present their views. Mexico is the only country that promotes participation of vulnerable and under-represented groups during budget execution, through social audits that involve beneficiaries of social programs targeted to disadvantaged groups. If more countries followed their example, public spending could be better targeted and therefore more effective, a very important plus during crises, when resources are scarce and needs great.

While citizens are frustrated with governments for many reasons, this lack of attention and consideration for the poor and disadvantaged will likely fuel continued dissatisfaction. As successive waves of protests—both before and during the pandemic—have shown, citizens are increasingly and more forcefully demanding that governments chart a new course, one that takes their needs and interests into account, takes concrete steps to address long-standing structural inequalities and builds back trust by reshaping the social contract between governments and citizens. The enormous challenges that governments will face in the remaining stages of the pandemic, and its aftermath, make these demands more pressing, as choices about how to raise and spend public resources become more contentious and directly impact people’s lives.

Public policy processes—and the yearly budget cycle that underpins them—are one of the arenas where a renewal of the social contract can take place. Governments wanting to heed citizens’ calls could do worse than follow some of the positive examples highlighted above, lifting the veil of opacity around the impacts of their budgets.

These positive examples demonstrate how governments can take immediate and concrete steps to provide information on the budget’s impacts on poverty and inequality and involve citizens in formulating and monitoring the implementation of better budget policies that put reducing poverty and inequality at the heart of government action. As the COVID-19 pandemic continues to affect economies and societies, it is fundamental for governments to take these efforts more seriously. The ongoing formulation of their budgets for 2021 could be the perfect opportunity to get started.

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