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Public finance and development: top things to read in February 2021

Written by Tom Hart, Cathal Long


ODI Trustee Shanta Devarajan finds three reasons to be optimistic about 2021. One of these is on public spending: the trend for greater engagement with civil society in managing this spending means it has a better chance of reaching people in poverty.

This month’s round-up covers the International Monetary Fund’s (IMF) Fiscal Monitor Update, prospects for tax reform, the dilemmas of public investment, and two new reports on digitalisation in government.

Fiscal constraints continue to bite in the Global South

There is a revolution underway in macroeconomics. A new fiscal consensus calls for a more activist fiscal policy, a bigger role for public spending, less focus on debt levels and more on the cost of servicing debt. This is borne out of the continued decline of debt services costs in many high-income countries (HICs) – driven by low interest rates – even as debt has expanded.

But this is a consensus based on the experiences of HICs. The IMF’s Fiscal Monitor Update continues to call for “a synchronised public investment push by economies with fiscal space” that can boost growth and generate positive spillovers. But where does this leave countries like Ghana, Kenya, Myanmar, Nigeria and Zambia where the IMF forecasts that debt service costs will be more than 20% of tax revenues in 2021?

The fiscal response to the Covid-19 crisis is shaped by access to financing. The Fiscal Monitor Update shows that fiscal deficits reached an average of 13% of GDP in advanced economies in 2020 and an average of 10% in emerging market and middle-income economies. But they only reached 6% in low-income developing countries. In advanced economies, half of the deficit increase reflects additional spending measures. However, in low- and middle-income economies, the rise in the deficit comes largely from a collapse in revenues, and not from any new spending.

Many of these countries are expected to tighten their fiscal policy in 2021 due to high debt levels, exchange rate risks and concerns about market access to borrowing if large deficits persist. There are also risks that International Development Association (IDA) financing could decline at the same time, just when more support is needed. My colleagues Mark Miller, Annalisa Prizzon and Iain Steel welcome the 50% scale-up in IDA operations in 2020 compared to 2019 but note that this has come from frontloading grants and loans. They set out what needs to be done to ensure financing does not fall in 2022 and 2023 as many low- and middle-income countries (LMICs) cannot borrow at scale – or at all – from international capital markets.

Prospects for tax reform

Given that many countries saw a fall in revenues in 2020, a focus on taxation is going to be increasingly important. Odd-Helge Fjeldstad and Ole Therkildsen have prepared a useful overview of the prospects for increasing revenues in sub-Saharan African countries. They are sceptical of the political potential for more redistributive taxation. They argue that revenue increases will come from “making gradual improvements in taxing a range of sources, combined with fewer tax exemptions and subsidies.”

Two studies tell us more about what does and does not work in tax administration reform. First, the good news, from a study on medium-sized taxpayer offices (MTOs) in Indonesia. These were created in the mid-2000s for each region’s largest corporate taxpayers. They had a far higher staff-to-taxpayer ratio (1 to 1-26 firms) than the old structures (1 to 56-125 firms), which led to dramatically increased corporate revenues at a low cost. Taxes paid by firms handled by the new MTOs more than doubled over six years compared to what would have been expected under the old structure. And the cost of this was less than 1% of additional revenue collected.

Second, evidence from South Africa shows that a large-scale expansion of the business taxpayer registrations resulted in relatively little additional tax revenues. This bolsters Mick Moore’s proposition – noted in our December round-up – that African Revenue Authorities’ “registration obsession” was doing little to help them improve revenue collections.

Investing in infrastructure

Hannah Ryder outlines what is wrong with the current narrative of the African debt crisis, explaining that you cannot generalise across the continent. Doing so is ahistorical and ignores both the need for investment on the continent, and the agency of African governments.

One example of this huge investment need is that more than half a billion people across Africa do not have access to electricity and make up over two-thirds of the world’s non-electrified population. How can African countries meet the Sustainable Development Goal (SDG) targets for universal electrification? Should this be done through expanding the electrical grid to rural areas, or through off-grid solar systems? Studies in Burkina Faso, Senegal and Rwanda show that households value grid connections more than off-grid schemes. But there are large gaps between these household valuations and the costs, even for the cheaper off-grid schemes. This means that achieving universal access to electrification will require the subsidisation of off-grid solar power.

A recent World Bank report similarly concurs that poverty is the problem for expanding electricity access in sub-Saharan Africa. Many households that live near the grid are not connected, even as utilities run at a loss. But it takes a different approach, focusing on how to ensure that electricity investment has a higher economic pay-off in terms of creating jobs and raising incomes. It argues that reliability of electricity should be prioritised ahead of expanding access, and that electricity access must be coordinated with complementary investments in roads, access to credit and skills training. Making progress towards the SDGs will require prioritisation and countries looking to connect their budgets to the SDGs can learn from Mexico’s approach.

In line with their continued emphasis on pushing public investment, the IMF has launched a new infrastructure governance portal. This usefully brings together the IMF’s analytical work as well as its diagnostic tools, the Public Investment Management Assessment (PIMA) and the PPP Fiscal Risk Assessment Model. While the IMF states that it “encourages the publication of PIMA reports”, it can only publish with permission from the government. But out of the 63 PIMAs detailed on the latter’s website, only 20 are publicly available. The regional pages do show the regional average scores for each PIMA dimension and allow comparisons against income group averages, but while this data is visible (and with enough time could be manually transcribed) it cannot be downloaded.

Two new reports on digitalisation in government

First, here in the UK, the Commission for Smart Government released its policy paper on Better Digital Government. The paper begins by stating that the UK is no longer a digital powerhouse (something others have said previously), citing the IT problems that the National Health Service has experienced throughout the pandemic as a consequence of this digital underperformance. It goes on to make a whopping 56 recommendations.

Among them are:

  • create cross-cutting Digital Task Forces to break down departmental silos
  • set up a National Digital Council to elevate digital issues to the top of the government agenda
  • establish a new Department of Digital, Innovation and Technology.

This may sound great to those who have been advocating for new institutions for the digital age, but how will senior civil servants react to “kids in jeans”? Breaking down institutional silos is easier said than done, and requires risk-taking by government leaders.

Second, the World Bank released its GovTech Launch Report and Short-Term Action Plan. The initiative aims to use ‘technology to support government operations, service delivery and transparency’. It will focus on three core areas of public sector modernisation:

1. Human-centred service delivery

This involves changing and improving the way that customers access and use government services, an area where Estonia and Singapore have been leading the way. Third parties can get involved here, such as helping people to access food assistance. Even footballers are taking part.

2. Citizen engagement enabled by CivicTech

In other words, allowing governments and citizens to communicate with each other more effectively, including on issues like budget transparency. This again is an area where third parties have made contributions, such as helping to get your local council to fix your street.

3. Modernising core government operations

This includes areas like e-procurement, but also improving the interoperability of existing systems (such as Financial Management Information, Tax and Customs Management, e-Procurement, and M&E) using shared platforms and application programme interfaces (APIs). This interoperability allows for more ‘analytical processing capabilities for decision support, performance monitoring, and web publishing’.

An example of this is Uganda’s Online Transfer Information System (OTIMS). This system uses data from multiple government agencies and exchanges it with other financial management information systems – like the budget preparation system – using APIs. This is done to calculate and show formula-based financial allocations to local governments.

While all this sounds – and could be – wonderful, the report is quick to point out that GovTech relies on the foundations of connectivity, robust identity systems, digital payments, and reliable national data registries’. These foundations are similar to the Commission for Smart Government’s list of ‘what is needed for reform’ which includes a common cloud infrastructure, canonical registries, open APIs, and more. For many LICs, connectivity remains the biggest challenge, but the other foundations are also not straight-forward. OECD countries have also been struggling with these foundations, for example, on registries, which are the most foundational of all the building blocks.