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Digital public finance: top trends in December 2023 and January 2024

Expert Comment

Written by Cathal Long, Andrea Sissa Velandia

Hero image description: 3D smart digital city Image credit:3D digital smart city. ThinkHub Studio, Getty Images.

Welcome back to the Budgets and Bytes blog, ODI’s bi-monthly review of the top trends in public finance and digital.

In this first instalment for 2024, we cover an array of risks associated with digitalisation, including the use of AI in government; government reliance on ‘Big IT’; the dangers of digital public infrastructure (DPI) for democracy; and the downsides of digital money for macroeconomic stability.

Here are the top trends we saw in digital and public finance as we entered 2024:

1.Are governments ready for the AI era?

According to Jennifer Pahlka’s recent testimony on the use of AI to improve government services, the US government, at least, is still trying to realise the potential of the internet era:

“We may be able to make progress by applying AI [within government agencies], but not if we double down on the remedies that failed in the Internet Age and hope they somehow work in the age of AI. We must finally commit to the hard work of building digital capacity”.

Pahlka recommends that rather than overly constraining the use of AI, the US government – and possibly most governments – should work on addressing underlying systemic issues (such as the complexity of government programs or inefficiencies in service delivery) by “having more of the right people doing the right things” and “reducing the burdens” on those people. Pahlka contends that AI should not be seen as a panacea for all ills – applied without a real understanding of the problem it is trying to solve – and that the use of AI for service delivery must be a response to underlying structural issues, such as bureaucratic burdens or lack of digital capacity.

As governments continue to reckon with the role of AI, the experience of people like Pahlka, as well as further research and guidance, will be useful. Examples of this include the recent paper from Florian Keppeler, showing that less people apply for public sector jobs when AI’s role in the application process is disclosed, and this Asian Development Bank report on managing digital risks, including those associated with AI.

2. What did we learn from the Post-Office Horizon Scandal?

Nothing we shouldn’t have known already, according to Mike Bracken and Andrew Greenway, former officials of the UK Government Digital Service and founding partners at Public Digital.

For those unfamiliar with the story, over 700 Post Office operators were handed criminal convictions when faulty Fujitsu accounting software (“Horizon”) falsely showed that money was missing from their branches, resulting in disastrous consequences for the operators’ livelihoods and in some cases their lives.

According to Bracken and Greenway, such failures of big IT are entirely predictable. Like Palkha (above), they see the problem not with technology but rather with a lack of decision-making capability in government when it comes to the technology. Greenway describes “a generalist civil service [offering] cover for a culture that values ability with words above expertise in delivery”, which is further hampered by (according to Bracken) a “Treasury approach” that is biased towards single suppliers on long-term contracts, creating “the legacy IT arrangements that bedevil the public sector”.

Unfortunately, this doesn’t appear to be changing. Recent analysis by Tussell shows that 150 “Tech Titans” command almost 90% of UK government spend on IT, while 5,298 other IT suppliers make up the remainder. Fujitsu was seventh on the list in 2021.

Finance ministries purchase a lot of software themselves and more importantly, they also help make the rules for how the rest of government purchases software. For governments in lower income countries that are thinking about their digital infrastructure, the advice is clear – be very careful about giving out long-term contracts to big IT suppliers, without first ensuring the capabilities to manage those contracts are in place.

3. Is digital public infrastructure (DPI) dangerous for democracy?

Amidst the fanfare around DPI, it's easy to forget that it's a means to an end, a tool to improve services. In a recent essay, Yamini Aiyar raises concerns about DPI’s impact on democracy and the welfare state in India:

“India is coalescing toward a “techno-patrimonial” character of welfarism (…) [that] casts citizens as passive recipients (labharthis) of state largesse rather than active claim-making, rights-bearing actors.”

Aiyar’s view stems from the growing trend of competitive welfarism as a political battleground in Indian elections, with both major parties making promises of direct cash and benefit transfers to achieve electoral returns. While some argue that DPI has enabled more efficiency – although according to Aiyar there is insufficient data available to make this claim – Aiyar notes it has also enabled leaders to bypass local intermediaries and directly connect with voters. As she noted at the 2023 ODI Public Finance Conference in September, this is leading to a preference for direct benefits over investing in public goods.

Aiyar’s essay raises important questions about what we want from the state, as well as for the DPI Safeguards agenda.

4. Will digital money weaken economic resilience?

Back in 2021, Budgets and Bytes covered concerns about the impacts of digital money on weaker currencies. This remains a significant concern for the International Moneytary Fund (IMF), who recently released a new working paper on the Macro-Financial Impacts of Foreign Digital Money.

The paper models the macro-financial effects of making foreign digital money (a stablecoin) available in a small developing economy. The findings are concerning. While there are benefits, in terms of providing households with an asset to hedge against the risks of inflation or depreciation of the domestic currency, the economy becomes more exposed to shocks from abroad and capital controls are ineffective in preventing currency substitution.

As Budgets and Bytes covered in 2022, lower income countries require better ways to receive remittances from abroad, however the downsides of digital money appear to be as concerning as the costs of more traditional options. As ever, more research is needed.

News from our network

A big ‘thank you’ to all who participated in the third instalment of the BudgetByte webinar series, “Can governments make digital payments to citizens ‘smarter’?". The discussion featured contributions from the e-Gov Foundation and MicroSave Consulting on the MUKTA employment scheme in Odisha state; the UK Department for Work and Pensions on Universal Credit; and Give Directly on disaster responses in Nigeria and Mozambique, with commentary from ODI’s Christy Lowe on some of the potential risks.

As we enter 2024, we are delighted to see our colleagues in CABRI start the Enhancing Digital Public Financial Management in Africa programme, which promises to go beyond conventional IT technology assessments and explore what it takes for countries to harness the power of digitalisation for efficient resource management and enhanced service delivery.

In January, ODI hosted a roundtable “From India to Brazil and Beyond: The G20 Presidency and the Future of the Digital Public Infrastructure Agenda". Following this, we are looking forward to how future G20 Presidencies will: link DPI to the big global challenges of climate change, inequality and human rights; bring the views of civil society, the private sector, and more financially constrained economies – particularly those in Africa – into the discussions; and move the narrative beyond simply technology, to outcomes.

Check out our recent blog, ‘What do we know about health spending in sub-Saharan Africa?’ for what the latest data release from the World Health Organization (WHO) Government Health Expenditure Database (GHED) tells us about digital transformation in public financial management systems in Sub-Saharan Africa.

In sad news for the Digital and Public Finance Hub, we recently said goodbye to our colleague Nicholas Gates. We want to thank Nick for his invaluable contributions to the Hub and wish him the best in his new role at OpenForum Europe.

Finally, our ‘top trends’ update will now be shared on a bi-monthly basis. We encourage frequent readers to let us know what they are finding interesting in the world of digital public finance via our Budgets and Bytes LinkedIn group.