better targeted than subsidies

TABLE 6.1 Cash transfers are higher value and better targeted than subsidies

LICs

Cash transfer energy subsidy

MICs

Cash transfer

MVPF Incidence Share of spending to bottom 40 (%) Share of spending to top 20 (%)

0.9–1.6 <1

1.6–3.0 64 13 9 57

57 11

energy subsidy <1 24

Source: original calculations as explained in online annex 6A. Note: LiCs = low-income countries; miCs = middle-income countries; mVPF = marginal value of public funds. 37

reforms can be of higher value than this range (when tax rates are very high), but spending on tax reforms will be of lower value when tax rates are already low. It is also worth noting that valuing transfers at their MVPF rather than their face value would increase the progressivity of fiscal policy and reduce the degree to which fiscal policy was estimated to increase poverty in chapter 5.

Nonetheless, countries tend to use subsidies over transfers. The fact that subsidies benefit all households increases their popularity relative to targeted transfers, which may point to the need for less narrowly targeted transfer programs. Such programs would be more politically feasible while also preventing the types of distortions that reduce the value of social spending made via price subsidies. Subsidies are also much easier to implement quickly, as discussed in chapter 4, which can make them a preferred policy tool in a crisis when transfer systems are underdeveloped. This limitation then points to the need to invest in developing delivery systems in noncrisis times, discussed further in chapter 7.

High-value policies that support growth

The recent literature on policy evaluation and the application of the MVPF framework points to three broad findings on likely characteristics of high-value policies: (1) policies that improve child outcomes are of high value, across contexts; (2) policies that bring transformative growth tend to be of high value; and (3) spending to address market failures is often of higher value than subsidizing private behavior (in the absence of a positive externality).

Policies that improve child outcomes are often of high value, across contexts

Chapter 3 highlights the cost of the pandemic on the life chances of the following generation. Reversing this cost is a priority for today, even though the benefits will primarily be realized in the long run. Using the fiscal incidence analysis presented in chapter 5, box 6.2 shows that spending on health and education can be pro-poor. This section presents evidence showing that investment in child education and health will likely have high value, especially if it can reach poorer households. World Bank (2022) discusses in detail the types of policies that could represent this extra spending in the context of recovery from the pandemic shock.

Spending that invests early in a child’s life can be transformative (if effectively implemented) and position the child for a lifetime of higher earnings. Most applications of the MVPF framework have been in high-income countries (HICs) and to policies typically in one of four domains: social insurance (health, unemployment, and disability insurance), education (from preschool to job and vocational training), taxes and cash transfers, and in-kind transfers. Despite very different fiscal trade-offs in the HIC setting than in LIC and MIC settings, the results from these