Are the Poor Protected from Budget Cuts? Theory and Evidence for Argentina

Abstract

Time-series data for Argentina suggest that action to support propoor social spending is warranted at times of fiscal contraction. Social spending in general - and social spending targeted to the poor in particular - took a heavy hit at times of fiscal austerity.

Adjustment programs often emphasize protecting social spending - especially propoor spending - from cuts. Yet the incidence of fiscal contraction - and hence the case for action to protect public spending on the poor at a time of overall fiscal austerity - is an empirical question, which Ravallion addresses using data from Argentina.

Aggregate budget cuts in Argentina in the 1980s and 1990s typically brought proportionately greater cuts in social spending. Nonsocial spending was protected. But proportionate cuts for types of social spending that matter more to the poor were about the same as the cuts for those that tend to favor the nonpoor. Absolute cuts were in fact greater for social insurance that matters more to the nonpoor.

But spending on targeted social assistance and employment programs was more vulnerable to aggregate spending cuts than were more universal social services. Social spending was clearly exposed to fiscal contraction, but this was somewhat less true of propoor spending on things that also benefited the nonpoor.

So fine targeting may be a mixed blessing for the poor, bringing greater vulnerability to cuts, possibly when help is most needed. There is a strong case for action to protect propoor social spending at such times.

An externally financed workfare scheme in Argentina was far better targeted than other social spending but still had to ensure that a small but relatively well-protected share of the benefits went to the nonpoor.

The program was clearly subject to the same political economy constraints that influenced the incidence of past fiscal contractions in Argentina. The program expanded into poor areas when the budget increased but retreated from poor areas when the program was cut. It was the program's disbursements to nonpoor areas that were protected. Still, given the low wage rate offered, the direct benefits from the program were still likely to have favored the poor, even after the cuts.

This paper - a product of Poverty and Human Resources, Development Research Group - is part of a larger effort in the group to better understand the incidence of social spending. The study was funded by the Bank's Research Support Budget under the research project Policies for Poor Areas (RPO 681-39). The author may be contacted at [e-mail].

JEL Classification: E62, H22, I38