Financial Crises and Social Spending: The Impact of the 2008-2009 Crisis

Abstract

Financial crises in developing and transition countries have often proven disruptive to policies and programs due to procyclical trends government spending growth. Given the importance and significant component of public budgets devoted to education and health cuts in government expenditures during recessions potentially place social programs at risk. This paper analyzes the experiences from 1995-2007 for 131 countries; projects fiscal social spending to 2013; and, examines specific issue around fiscal social spending in the current crisis including donor responses, and government and household coping mechanisms.

Growth rate trends in education and health spending fluctuate overtime with greater volatility in education. Despite this pattern, absolute fiscal spending rises steadily overtime with brief periods of flat trends over one or two years, the latter reflecting periods of GDP growth declines in GDP growth. Public spending tends to be more counterclyclical for education compared to health. While sharp declines in growth rates of fiscal social spending are projected, they are balanced by projected increases in absolute spending over the 2008-2013 period.

HIV/AIDS funding appears largely protected in the current crisis as the two largest programs – the US PEPFAR Program and the Global Fund for AIDS, TB and Malaria – are not expected to contract. Moreover, 38 percent of all GFATM funding over 9 rounds of funding is not yet spent by recipient governments leaving a significant cushion particularly in Sub-Saharan Africa where almost half of all allocations remain to be spent. Donor funding historically moves procyclically in developing countries, but there have been major shifts in recent years. During the current crisis World Bank lending expanded by 50 percent as governments ramped up safety nets. Regionally only Eastern Europe was hit hard. Declining spending on that region’s social programs has forced long delayed reforms, but there have been negative impacts on household spending and particularly in health, though education spending has been far less affected.

Keywords: Financial Crisis, Social Spending, Health Spending, Education Spending, Financial Crises And Education And Health Spending

JEL Classification: E62, E65, E35, H51, H52, O23