Financing the SDGs – what lessons can we learn from the MDGs?

We’ve got a busy week ahead of us here at Government Spending Watch, we have a launch event in Norway with State Secretary Brattskar, a launch with ODI and the One Campaign in the UK, called “Financing the future: will Addis deliver?”; and meetings with Swedish officials in Stockholm.

All these events aim to highlight the findings from our recent 2015 GSW report: “Financing the Sustainable Development Goals: Lessons from Government Spending on the MDGs”.  The report is a culmination of 9 months’ work, compiling the latest budget information into the Government Spending Watch database – making it the most up-to-date and comprehensive picture on government spending on the MDGs in this final year of delivering the ‘Millennium Promise’. The report also draws on the accumulated experience we’ve gained from five years of compiling and analysing information on government spending on the MDGs.

But we haven’t done this simply as a retrospective exercise; we timed the report to coincide with the UN Financing for Development meeting in Addis, which will be discussing the hottest topic in development right now – how to finance the new Sustainable Development Goals (SDGs). That’s because we think there are vital lessons to be learnt from our experience and data, to help inform the current debate. In fact, it is rather staggering just how little information on current government spending and financing is informing the debate. In spite of the fact that the SDGs are supposed to build on the MDGs, learning lessons from their gaps and shortfalls, there is a remarkable lack of discussion about lessons from the spending and financing of the MDGs.

It was this lack of information on MDG spending which initially prompted us to set up Government Spending Watch with Oxfam – because we believe that there is an urgent need for a clearer picture.

So, as the world moves towards the Financing for Development meeting in Addis, the 2015 Government Spending Watch report takes stock of progress on spending and financing in some of the key MDG sectors, and what lessons can be drawn for financing the SDGs. It does this by analysing where current spending levels stand, how large a gap there is between this and the new SDG promises, and how the MDG spending is being financed.

Where does the world stand in financing the MDGs?

The report shows that none of the spending targets for the MDG sectors are anywhere close to being met, even though there is clear evidence that increased spending on the MDGs accelerates delivery of the goals (as Chapter 4 of the report shows).

Even the best-performing sectors are falling well short of what is required. Education performs best, but only around 20% of countries are meeting one or both of the ‘Education For All’ targets. No African country is meeting its Abuja health spending target. Average spending is only half the targeted level. In water, sanitation and hygiene; and social protection spending averages less than 1% of GDP.  This means there are already large gaps in spending to meet the MDGs – according to our analysis, MDG spending is falling one-third short of needs.

Scaling-up spending to meet the much more ambitious SDGs is a vast undertaking. For instance, the SDG target for zero hunger and sustainable agriculture will require a doubling of spending; the universal free health care commitment will need an increase of US$50-80 billion; and universal access to WASH demands US$24 billion more. Overall, using the various assessments available across the SDG sectors, this could mean additional public spending of US$3 trillion a year.

Financing the new sustainable development goals

So how should this be financed? This is the focus of all the heat in the FfD negotiations, and the report has some interesting findings to make them hotter.

A lot of global discussions on financing the post-2015 goals seem to be saying that international public finance (especially aid) is no longer important, and most of the SDG agenda can be paid for with international private finance or governments’ own tax revenues. Non-concessional finance, public-private partnerships, and private finance, can all have important roles in financing the SDGs, notably in the most profitable sectors and projects, and for upper-middle income and OECD countries. However, the report cautions heavily against using these expensive and risky types of finance for less profitable sectors and low/lower-middle income countries. Debt burdens are already rising fast or very high in a large number of LICs and LMICs, and debt servicing is already “crowding-out” MDG spending in 21 of 66 countries. So the scope for non-concessional public or private finance in these countries and in the social sectors is very limited.

The second lesson is that international public finance remains absolutely key for sustainable development. In lower-middle and low-income countries, least developed countries, small islands, fragile and conflict-affected states, or simply those countries with the most need, concessional finance and ODA remain vital. We estimate that, taking into account the contribution the private sector could make (around one-third of funding in these countries), public financing must be scaled up by at least US$1.5 trillion a year.  This requires three sets of actions.

The most important is to help developing countries accelerate the recent increase in their tax revenues. The GSW report shows that LICs and LMICs have already made major strides in this area during the MDG period, managing to increase revenues by almost 9% of GDP since 2000, trebling the amount of spending funded by revenues, and currently funding 77% of MDG spending themselves. They have done this by introducing new taxes, improving tax collection systems, renegotiating tax and royalty agreements with major extractives companies, and clamping down on tax exemptions.  In addition, this money has been very high quality – revenue-funded spending tends to be much more stable, aligned with government priorities, balanced between investment and recurrent, and easy to implement than donor-funded spending. So it is the top priority.

GSW calculations indicate that, to continue to fund three-quarters of the SDGs from tax revenues, countries will need to double their tax revenues, and therefore to raise their revenue/GDP ratios by a further 10%. Some of this can come from higher income levels and traditional tax reforms, but in most countries these reforms have little scope left to increase revenues. The vast bulk of extra revenues will require a radical overhaul of global tax rules. This means going way beyond the current OECD discussions on Base Erosion and Profits Shifting (BEPS) and Automatic Exchange of Information on company tax payments, which would raise only about 1.5% of GDP. It means OECD governments, international organisations and developing countries working together in partnership to end almost all tax exemptions; revise investment and tax treaties to give preference to paying taxes in countries where commodities are extracted; forensically audit large corporations to reduce their tax evasion and avoidance; and OECD countries and tax havens agreeing to supply information unilaterally to developing countries on bank accounts held by individuals overseas (unilaterally because it is highly unlikely that French citizens for example are avoiding tax by putting money in accounts in Senegal).

To implement these changes successfully, developing countries will require major capacity-building support on these additional issues: current plans to provide TA to help implement BEPS fall way short. It would also seem essential that they get equal decision-making power on global tax reforms, with a strong voice for the countries with the most needs, preferably through a reinforced UN Tax Committee transformed into an intergovernmental tax body. Taken together, these measures would be a genuine partnership between developing and developed countries, to ensure developing countries get their “fair share” of global tax revenue.

The second set of actions is a doubling of development cooperation. ODA has doubled during the MDG period, and South-South cooperation has trebled, but its share of MDG financing has fallen to only 23%. To ensure that international finance bears its fair share of the burden of financing the SDGs, DAC donors would need to commit to reach 0.7% of GNI by 2025, mobilising an additional US$250 billion a year; and South-South cooperation providers could continue recent rates of increases, which would bring South-South cooperation to US$80 billion a year by 2030.

But these amounts from provider country budgets will not be enough. We need to mobilise large-scale extra resources through “innovative financing” – financial transaction and carbon taxes, or IMF Special Drawing Rights, totalling US$500 billion a year if we are to finance the SDGs for LICs and LMICs (though we could do more and help to finance the SDGs in OECD countries as well).

Put simply: we need to double tax revenue, double development cooperation and be bold on mobilising innovative financing. The Addis conference represents our best chance to launch bold coordinated action to finance the SDGs in ways which do not bankrupt poor countries or force them to ditch half the SDGs up front. DFI and Oxfam are working with more than 50 governments to try to make this happen so that the SDGs are not dead at their birth.

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