Do we need sectoral budget targets? Yes, er no, er, well its complicated

One way to get governments to spend money on the right things  is to set a percentage target. In this way targets have been set for health, education and agriculture.

We all want development challenges related to health, education and agriculture to be addressed. But are sectoral budget targets the right way to do it? Ravi Duggal thinks it is. Jason Lakin thinks it isn’t.  Read their arguments below. Then let us know what you think.

Sectoral Budget Targets: not the right approach to managing our money

by Jason Lakin, International Budget Partnership

In recent years, declarations proclaiming that countries will strive to achieve internationally agreed upon, sectoral budget targets have proliferated. The Abuja declaration committed African leaders to a 15% budget target for health expenditure. The Maputo declaration similarly requires that 10% of the budget be earmarked for agriculture. The Dakar declaration set a 20% budget goal for education. These three targets alone commit nearly half of African budgets.

On its face, it is hard to argue against governments spending a considerable share of government revenues on these social priorities. The question remains, however, whether these kinds of targets are consistent with good financial management and democratic practice, and whether they ultimately achieve the goals of increased social spending and social welfare. There are good reasons to be skeptical.

A first concern is how such targets are set. What is the basis for the claim that governments should spend a particular percentage of their budget on a particular sector? For example, why spend 10% on agriculture and not 15 or 20%? It is not clear that any consensus can or should exist about the precise share of the budget that should go to particular priorities.   Even if we assume that all governments ought to prioritize poverty reduction, for example, there is no consensus about exactly how to do this.  Various combinations of expenditure could reasonably be expected to lead to improved development outcomes.

Nor is it the case that countries which spend more on a particular priority necessarily achieve better results. It is frequently recognized that the United States, which spends more than any other industrialized country on health care (as a share of GDP), does not achieve better health outcomes. On the assumption that more is better, we could urge governments to spend up to 20% of GDP on healthcare, but we know that countries spending close to half of that perform equally well, leaving resources for other priorities.

Suppose that we took the average health expenditure by developed countries (as a percentage of GDP) as our sectoral target. That average would be skewed by high spending countries like the United States. We would therefore be advising governments to spend more money on health because some countries do so, even though those high-spending countries do not achieve better results. If this caused a government to increase its health budget by, say, 1-2% above truly optimal spending on health, this would actually reduce welfare by taking money from one priority and spending it where it is less needed. Unless there are clear reasons to select a particular number as the right target for a sectoral budget allocation, therefore, it is not clear that reaching targets necessarily achieves improvements in social welfare.

A second question we should ask is whether it is appropriate for the international community to set domestic spending targets. Suppose that in a particular country at a particular time the citizens of that country believe that the most important thing they can do is to invest in education. And suppose that they choose, therefore, to invest 25% of their budget in education and only 5% in agriculture. In another country, agriculture may be seen as more important than education, and in that country, 20% of the budget may go to agriculture while only 10% goes to education. Who has the right to quibble with these allocations?

To be sure, government spending choices are not always taken in a democratic form, and final allocations may not reflect the will of citizens.  Internationally declared budget targets may in fact be geared to addressing this problem, by imposing international “best practice” on non-democratic countries.  But do two wrongs really make a right?  There are a variety of reasons to choose different allocations for different priorities, and imposing one international standard actually undermines democratic decision-making processes. (This complaint has often been heard with respect to IMF austerity programs in the past.)  There is no question that governments should open their budget processes to citizen participation, and opportunities should be provided for public debate about spending priorities.  This is an appropriate goal for which the international community can advocate.  The ultimate decision about how to allocate resources between different priorities, however, should be left to domestic processes that incorporate citizen participation, not international conventions.

Another problem with sectoral budget targets is that they encourage governments to engage in arcane counting exercises rather than focus on providing high quality services. So, for example, governments seek ways to count spending towards sectoral targets rather than devoting their attention to improving the quality of spending. It is also obvious that if a government decided to invest 20% of its budget in sports facilities at universities, we would not feel that this was a legitimate effort to meet the education spending target. Advocates of targets might argue in response that we should be ever more specific about the targets, but this is a fool’s errand. How can the international community decide how much a government should dedicate to tertiary versus primary education? To preventive versus curative care? To HIV versus Onchocerciasis? To irrigation versus extension services?

Fundamentally, budget targets reduce the flexibility of governments to respond to the needs of citizens, impose arbitrary goals on domestic governments, and provide no guarantee that public expenditure is either adequate, of high quality, or appropriately targeted. What we really need to promote is greater democracy, so that citizens can participate more fully in decision-making, and greater access to information, so that citizens are informed about the decisions they need to make and the trade-offs they need to endorse. In addition, we need to promote the development of institutions which ensure accountability, so that money which is allocated to specific priorities actually reaches the intended beneficiaries.

Why Sectoral Budget Targets are Necessary

post by Ravi Duggal, International Budget Partnership

Health and education are two key areas wherein a lot of mathematics has gone into developing benchmarks for public spending.  Global experience has been culled by multi laterals like the WHO and UNICEF and a broad benchmark developed – 5% of GDP for healthcare and 6% of GDP for education. Most countries that have achieved universal access to healthcare and basic education allocate budgets around these benchmarks.

These benchmarks may appear to be an overestimate for developing countries (since purchasing power parity across economies differs). But when viewed in terms of other benchmarks, like countries having a tax: GDP ratio of around 25% then they make more sense. Most developed and middle-income countries are close to the 25% tax: GDP ratio and it is the latter achievement which makes the classic welfare state realizable.  The higher the tax:G DP ratio, the more liberal the social security package. In contrast most developing countries languish between 10-15% tax: GDP ratio and hence the 5 and 6 percent benchmark for health and education become more modest.

Since developing country governments are unable to collect adequate revenues, they are unable to allocate adequate resources for social security and other development spending. As a consequence, development aid and out-of-pocket expenditures for health and education fill the gap. Interestingly,  if public and out-of-pocket expenditures in developing countries are added up,  then the overall expenditure in these countries is also close to the benchmark of 5%.

Global experience tells us is that in most countries whether developed or developing, total healthcare spending is more than 5% of GDP.  But to have good health outcomes public spending on health should be close to 5% of GDP. That is, if a country spends 6% of GDP on healthcare and of that 5% is out-of –pocket, then health outcomes are going to be poor. But if the spending pattern is in favour of public financing, then the health outcomes become more favourable.  That is because market framework and healthcare financing is more prone to huge market failures.

In the last decade we have seen such transition towards larger public financing in countries like Brazil, Mexico, Venezuela, South Korea, Malaysia, Thailand etc. and their health outcomes have certainly improved significantly. We have also seen that when there is compression of budgets in developed countries and public health allocations get affected, health outcomes are also negatively impacted – Greece, Spain, Italy are recent examples.

Some countries have even shown that it is possible to achieve good health outcomes with public budget allocations of less than 5% of GDP. Sri Lanka, a low-income country, has demonstrated success with around 2.5% of GDP for many years.  Thailand, also a lower middle-income country, has recently progressed towards universal access to healthcare by doubling its public spending from 1.5% of GDP to 3% of GDP in 5 years. India has recently benchmarked 3% of GDP for healthcare through public budgets as a target to be achieved in the next five years from its present less than 1% of GDP so that it can emulate the success of Thailand.

Thailand upgraded rural infrastructure and medical graduates were made to adhere to a compulsory requirement of 3 years of public service in rural areas before they were given a license to practice or allowed to pursue a post-graduate degree. For higher levels of care regulated contracts with the private sector were negotiated. In contrast the US government spends over 5% of GDP on health and citizens spend another 8% of GDP via private health insurance or out-of-pocket payments. Yet health outcomes of the US are one of the worst amongst the developed countries.

Global benchmarks for social sector spending like health and education are important guidelines to strive towards but are not adequate in themselves. They have to go hand in hand with appropriate financing and delivery mechanisms which are organized, collectivized and regulated to achieve economies of scale.

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