Mobilizing resources for care: A holistic approach for financing Albania’s universal care services

Introduction

Albania has made significant progress towards achieving gender equality, reversing gender gaps in higher education attainment, increasing political participation and leadership roles of women, decreasing the gender wage gap, improving health outcomes, and accessing financial resources, among others.¹ Despite the many achievements, especially in human capital formation, women have been unable to capitalize on these gains in the labor market. Gender gaps persist in terms of labor force participation and employment.² In 2023, the labor force participation rate of women was 69.8% compared to 81.0% for men.³ Likewise, employment rates show a 10.3 percentage point gap between men and women. The gender gap in employment persists even among those who are highly educated.⁴

Among the main factors impeding women from productively using their human capital accumulation and increasing their participation in the labor market is the lack of care services and the responsibility for unpaid care work.⁵ Women, especially those with younger children, are by far the largest participants in unpaid care activities and domestic work in Albania. Childcare remains primarily women’s responsibility regardless of their employment status. The underutilization of women’s human capital accumulation in the labor market has economic repercussions not only in terms of gender equality, but also for the economy at large.⁶ This is especially important in a country with high informality rates, an aging population, and growing migration outflows. Estimates show that addressing gender disparities in employment can result in a 12% increase in per capita gross domestic product (GDP).⁷

Value and importance of the care economy

The total unpaid care work performed in Albania in 2022 is estimated to be equivalent to more than 1,319,000 full-time workers, with women accounting for 86% of this labor.⁸ This unpaid care work represents 89.9% of the total care economy, highlighting the vast “invisible” portion of care labor. The remaining 11.1%, the “visible” part of the care economy, includes workers in formal sectors such as education, health, and social services, as well as domestic and personal service workers across other sectors. Overall, women make up 84.9% of the entire care economy. When valued in monetary terms, the unpaid (invisible) portion is equivalent to 53.1% or 32.8% of extended GDP (when using the average national wage), while the visible portion accounts for 7.7% of official GDP in 2021. Taken together, the care economy contributes an estimated 61% of the national economy, underscoring its critical, yet largely unrecognized role.⁹

The provision and formalization of care services has been found to have many positive spillovers. Universal care services can boost job creation and enhance women’s employment opportunities, increase the contributory base along with contributions to the mandatory pension scheme, boost tax revenues, and support inclusive economic growth.¹⁰ An estimated 16,600 jobs may be created for the provision of early childhood and childhood care services to non-enrolled children.¹¹ These estimates primarily address childcare, yet the potential for job creation is even greater when the need for elderly care is considered. Access to formal elderly care in Albania remains limited, despite a rising demand. According to the ILO, about 91 thousand elderly (approximately 21.6% of those aged 65 years and above) require long-term care, but fewer than 2% currently receive formal support. ¹²

Additional benefits that would ensue from job creation are the increases in government revenue and social contributions. As a result of high informality rates, underreporting of wages, and lower labor force participation, Albania has a shrinking contributory base to the mandatory pension scheme. The coverage rate of contributors to the pension system is low, covering only 42.0% of the working population aged 15-64.¹³ The additional annual gross wage bill resulting from the projected job creation is estimated at 16,340 million ALL (approximately $189 million), accompanied by an increase of 1,886 million ALL (approximately $22 million) in value-added tax (VAT) revenues and 4,253 million ALL (approximately $49 million) in social security contributions.¹⁴ These figures could be even higher if the formalization of existing informal jobs is taken into account. Overall, the estimated investment required to expand crèches and kindergartens to meet current demand stands at 94,733 million ALL (approximately $1 billion), which is equivalent to 8% of public expenditure or 3% of GDP.

Considerations for financing the care economy

The financing of a universal system of adequate care services requires expanding Albania’s fiscal space and a holistic approach to domestic resource mobilization. The tax system is largely characterized by complexity and fragmentation, with frequent ad hoc changes that have weakened its stability and reduced transparency.¹⁵ The current structure of revenue income is primarily focused on tax revenue, which accounts for about 58.5% of total revenue, while social contributions—social security and health insurance—make up the remaining 41.5%.¹⁶ The composition of taxes in 2023 consists of VAT, which accounts for about half of tax revenue (45.5%), followed by corporate tax (15.3%), excise tax (13.8%), personal income tax (13.7%), national tax (9.5%), and customs tax (2.2%).¹⁷ Tax revenue constitutes 17.8% of GDP,¹⁸ which is far below the EU average of 40.0%.¹⁹

Revenue collection is undermined by widespread exemptions, weak compliance, under-reporting of income, and a high level of informality in the economy.²⁰ VAT exemptions include a wide range of goods and services such as financial and insurance services, real estate transactions, international transport and related services, health and social services, education services, postal services, certain imports, etc. Various VAT exemptions may be eliminated to broaden the tax base, enhance revenue collections, and improve efficiency and equity of the tax system.²¹ VAT exemptions may be eliminated for private health and education services due to their regressive nature, non-prescription medicines and related products, due to the abusive nature of exemptions, fee-based financial services, first sale of newly built residential property, and tourism-related services, especially, focusing on five-star accommodations, which primarily benefit the wealthy.

Addressing the inefficiencies in tax revenue collection, VAT exemptions, reducing informality, and implementing property and carbon taxes has the potential to significantly enhance Albania’s revenue base. This can lead to potential gains of up to 5.5% of GDP,²² where VAT alone may account for 3.7% of GDP.²³ Streamlining procedures to reduce informality could raise revenues by an estimated 0.14% of GDP.²⁴ Furthermore, a well-designed property tax reform²⁵ in Albania has the potential to increase revenue, enhance fiscal decentralization, and promote more sustainable economic growth.

Policy recommendations

Financing care services is complex, with no one-size-fits-all solution. Effective approaches depend on existing policy frameworks, the mix of public and private service provision, regional and income inequalities, and the broader economic and fiscal context.²⁶ Financing a system of universal care services can help open fiscal space through tax revenue from increased employment and job creation, and contributions to the mandatory pension scheme.

1. The government should prioritize reallocating spending toward investments that expand fiscal capacity, while reducing expenditures that constrain it. On the expenditure side, social protection accounts for 29.4% of total expenditure, the overwhelming majority of which is absorbed by pensions. Spending on health and education only amounts to 9.4% and 7.6%, respectively.²⁷ Capital expenditures are a large category, comprising approximately 20% of total spending. ²⁸

To strengthen public financing of the care economy, a portion of the additional revenues gained from improving tax collection efficiency, reducing informality, and introducing new taxes could be allocated to expand funding for care services.

This is especially important at the municipal level, where the absence of dedicated budget programs for early childhood education and care limits both their ability to finance these services and the capacity to monitor related spending effectively.²⁹ Local government receives an unconditional transfer from the central government to finance preschool education, which does not include children under the age of 3 years. The funding formula allocates 60% of resources for teacher salaries based on the number of pupils, excluding children enrolled in crèches, and the remaining 40% based on the number of teachers. Broadening the funding formula to include children in crèches would guarantee dedicated financial resources for the effective management and growth of early childhood education and care services. Greater resources could be allocated to areas with a higher share of young children, lower coverage, a higher share of parents with lower income, and localities with weaker tax autonomy.³⁰

2. Furthermore, the Gender Responsive Budgeting (GRB) effort in Albania may be an entry point for prioritizing public investments in care services, accompanied by robust tracking at all stages of budget planning, implementation, and evaluation, and most importantly, assessing actual spending and its impact. An approach that includes incidence analysis and evaluation of outcomes at both the program and system levels should be adopted. While GRB has been effectively implemented at the national level, it could also become standard practice at the local level, accompanied by strengthened staff capacities and improved budget planning and execution. Moreover, the implementation of property tax reform has the potential to enhance the fiscal autonomy of local governments by enabling them to more effectively generate and manage revenues through property taxation and service-related fees.³¹ GRB could also be broadened to incorporate gender impact assessment of tax reforms and policies, including property taxes, and the reduction or elimination of VAT exemptions.³²

3. To help meet growing demand for care services, expanding service provision through public-private partnerships (PPPs) and community-based initiatives can play a critical role in this expansion, through shared costs and risks of building and maintaining childcare facilities. PPPs can be a useful tool to expand and improve the provision of care services if they are well-regulated and designed with strong public oversight, equity safeguards to protect those with lower incomes, and clear performance standards. They can increase investment capacity by mobilizing private sector resources and expertise, relieving public budget constraints, especially where infrastructure expansion is needed.³³ PPPs may also offer more efficient service delivery due to stronger incentives for cost-effectiveness, and faster implementation, as well as financial and operational risk sharing between the private and public sectors. However, without careful planning, they risk undermining access, quality, and long-term fiscal sustainability. PPPs may pose equity concerns by prioritizing profit over quality and universal coverage, which is important for both caregivers and care recipients.³⁴ Poorly designed contracts may lead to higher long-term public costs, as well as pose serious challenges in monitoring and enforcing quality provision.

4. Leveraging international funding and grants—particularly from the European Union (EU) and other donor sources—for the expansion of the care economy is another option to be explored, especially in underserved areas. Various instruments are intended for social inclusion, gender equality, employment, and human capital development. These include the Instrument for Pre-Accession Assistance (IPA III), European Social Fund (ESF), EU4Social Protection, EU4Employment programs, which contain components related to care work, unpaid care work, social infrastructure, etc., and may be employed toward this goal. This is particularly timely as Albania advances on its path toward EU accession, presenting new opportunities for alignment with EU social investment priorities.

5. Establishing progressivity in parental financial contributions in proportion to income, with a cap on fees (maximum amount to be paid by parents), may be cost-effective and increase accessibility of early childcare.³⁵ While the progressivity of the fee structure supports parents with lower income, the cap may strengthen support by middle- and high-income parents.³⁶ When these schemes are combined with well-targeted tax credits or child subsidies, they may result in increased coverage, availability, and affordability of childcare services.³⁷ Examples of successful implementation of these approaches include Denmark, Finland, Norway, and various German regions.³⁸ However, the success of these approaches hinges on administrative capacity, specification of design, and adequate outreach to ensure all eligible families benefit, especially those in vulnerable or informal settings. In the context of Albania, the scarce availability of early childhood care services is particularly pronounced in rural areas, which are also areas where local administrative capacities are low.³⁹

6. Partnering and engaging local communities in the planning, development, and management of care services helps reduce operational costs while fostering local ownership and long-term sustainability.⁴⁰ Furthermore, partnerships with non-governmental organizations (NGOs), especially at the local level, can support the co-financing and administration of care services, contributing to the establishment of new facilities while alleviating the financial burden on the public sector. NGOs are characterized by strong local presence and networks, which can improve outreach to marginalized, vulnerable, and hard-to-reach populations. They may be especially vital in rural areas to fill service gaps where the public sector lacks infrastructure. NGOs may serve to pilot innovative service models tailored to community needs, and they may also leverage additional funds from donors and private sector, relieving the fiscal burden on the local government. NGOs can strengthen local service delivery through the provision of training, technical support, and capacity building of local providers. Partnerships with NGOs can enhance the reach, innovation, and financing of care services, but to ensure a successful implementation they require strong coordination, oversight,⁴¹ and alignment with national standards to ensure equitable, sustainable, and high-quality provision. Furthermore, NGO services are unevenly distributed across regions, leading to geographic disparities in access and quality. They may also pose sustainability risks due to heavy reliance on external or short-term donor funding. Service provision through NGOs may also suffer from accountability and oversight challenges as well as coordination burdens.

Concluding remarks

The role of the care economy, its potential, and benefit of providing care services are undeniable and well-documented. Investing in the care economy and expanding availability and access to care services benefits gender equality while supporting inclusive economic growth. Creating fiscal space to support this investment may be achieved through greater domestic resource mobilization by undertaking equitable, efficient, and progressive tax reforms, introducing new taxes, reducing informality, and restructuring expenditures. GRB may be used as an effective tool to channel productive public investments in care services at the national and local level, and local governments may be empowered in their tax autonomy. Although financing of the care economy is not an easy task, successful models of implementation exist and may be utilized in Albania. Building on PPPs, community-based initiatives, availability of external funding from donor programs, and progressive parental financial contributions are some of the provisions that may be taken into consideration for the financing of the care economy.