4. Adapting DSAs to Combat the Extreme Inequality Crisis 4.1 Definition and Background/History of Past Efforts As discussed, many experts see the extreme inequality crisis 13 in many countries in the world as having major negative effects on economic growth, political stability, insecurity and crime, progress on education and health indicators, and many other key aspects of development – which are just as significant as those being produced by the climate crisis. In addition, analysts of the climate crisis including the IPCC have emphasised that the climate crisis cannot be successfully tackled without also sharply reducing inequality and poverty through a “just” green transition. Nevertheless, in contrast to efforts on climate, this is an area in which the IMF and World Bank have made no adaptations to their methodology, in either the SRDSF or the LIC-DSF. Indeed, the only mention of the“social sector SDGs” in the DSFs is the inclusion of a module in the SRDSF, tracking the potential negative demographic risks for debt sustainability(in countries with a growing proportion of elderly citizens) of growing costs for social security, pensions and public healthcare(see IMF 2022b). 4.2 The Way Forward: Integrating SDG10 into DSAs In spite of the lack of progress so far, it is easy to see how spending which would have a key impact on reducing extreme inequality and poverty could be factored into debt sustainability analysis. As with climate, this could be done through a module in the SRDSF(and preferably a similar module introduced as part of the review of the LIC-DSF, as discussed in 3.2.2. above for climate). This module could track the increases in the key types of spending needed to reduce inequality and their impact on debt sustainability. These types of spending have been shown in multiple studies to be education, health and social protection; additional sectors with strong impacts are water and sanitation, public housing, public transport, access to electricity and small-scale infrastructure such as rural roads and markets. It is suggested that the core sub-module of this module would include the sectors where the type of spending has the most significant impact on inequality across all countries: this could apply only to education, health and social protection; or be expanded to cover the other sectors the IMF included in its previous analysis of SDG costs – electricity, water and sanitation, and rural roads. The additional sectors(especially public housing and public transport) could be put in a second sub-module, mainly because reliable estimates of their costs across multiple countries are available only for OECD and some MAC countries, and used only when the spending levels in these sectors reach a trigger threshold as a percentage of total government expenditure. This would resemble the use of the adaptation and mitigation sub-modules for climate currently contained in the SRDSF, which are applied to different countries based on particular triggers. As with the SRDSF climate module, such a module could provide projections over a 30-year horizon under two scenarios: an“extended standardised baseline” scenario based on default costs in a template, and a customised scenario, where users can adjust the costs to country-specific characteristics. The customised scenario would also allow users to adjust the financing terms of the inequality-related investments, providing scope to show the difference between financing with concessional debt, tax, or grants. 13 Some interviewees have indicated that the suggestions in this section might be more palatable if they were phrased as adapting DSAs so as to ensure the end of extreme poverty(SDG1), given that the key sectors in which spending would be needed would be broadly similar. However, the World Bank has stated clearly that it will be impossible to end extreme poverty without dramatic reductions in inequality, so the focus is on SDG10. Series: Debt Sustainability Assessments& Their Role in the International Financial Architecture 10