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Public finance and development: top things to read in March

Written by Tom Hart

Spring has finally arrived in the UK, bringing longer days and green shoots of growth. The UK appears to finally have got something right in its Covid-19 response with its vaccine roll-out. But at the same time, the UK is making severe cuts to aid to many of the places where it is needed most. Last week’s budget represents a missed opportunity to support global development.

The first item in this month’s round up is the launch of our new working paper series on public finance and service delivery.

We’ll also cover:

  • The World Health Organization’s (WHO) new resource portal on public finance management (PFM) and health
  • The state of global PFM, as measured by Public Expenditure and Financial Accountability (PEFA) assessment scores
  • The impact of the pandemic on education spending, and challenges with debt relief mechanisms
  • The potential revenue gains from taxing ‘bads’ – carbon emissions, smoking and consumption of alcohol and sugary drinks – in low- and middle-income countries (LMICs), and how to tax the digital economy
  • Can bottom-up monitoring help improve service delivery?

Public finance and service delivery

This week ODI launched a new Working paper series on public finance and service delivery. The fiscal challenges facing many countries mean that the need for more efficient spending on public services has never been greater. While recent years have seen a growth in work seeking to understand how PFM matters for service delivery, its direct impact has proven hard to pin down.

We believe existing work on public finance and service delivery has been too focused on the budget cycle, and new research is needed to unpick the interaction of PFM systems with other public sector systems. A growing effort to establish diagnostics that compare systems to best practices risks overlooking the institutional diversity of government systems for delivering basic services. In-depth country case studies would instead promote a greater understanding of the diversity of institutional arrangements for financing and managing public service delivery.

We are calling for contributions to the series and welcome these from a wide range of PFM, sector finance, and fiscal decentralisation experts, practitioners, and researchers from all disciplinary backgrounds. More detail on the agenda animating the series are set out in the first working paper, Public finance and service delivery: what’s new, what’s missing, what’s next?

The WHO’s launch this month of its Resources Portal on Public Financial Management for Health attests to the growing interest in this area. The portal has an extremely useful collection of resources on PFM and health, the Covid-19 response, and vaccinations.

The state of global PFM

The PEFA Secretariat recently launched its Global Report on Public Financial Management. This presents trends in PFM using the dataset of PEFA assessments which now covers 549 assessments undertaken between 2005 and 2019 in 278 countries.

The key findings are that countries tend to have higher scores for processes around budget preparation than for processes around budget execution. The weakest scores were for internal audit, management of fiscal risks, external audit, and scrutiny by Supreme Audit Institutions and the legislature. Perhaps surprisingly, debt management was one of the highest scoring areas.

PEFA is usually thought of as a national-level assessment, but 40% of assessments were undertaken at the sub-national level. Across all regions, sub-national governments had worse overall scores. But while sub-national governments perform worse on budget reliability (expenditure and revenue outturns compared to the budget) and policy-based budgeting (measuring the quality of the budget preparation process), they scored marginally better than national governments on predictability and control in budget execution (revenue collection and budget execution processes). This pattern may be explained by particularly weak revenue forecasting in subnational governments.

The report also goes into greater detail on four assessments carried out in 2019 in Argentina, Ethiopia, Ukraine and the West Bank and Gaza. The publication of the PEFA dataset alongside the report is also particularly welcome, making it easily available to researchers and policymakers for the first time.

Fiscal costs of Covid-19

Evidence continues to accumulate on the fiscal impact of Covid-19. The World Bank-UNESCO Education Finance Watch found that two-thirds of low- and lower-middle-income countries have cut their education budgets since the start of the pandemic.

Many countries continue to struggle with debt. This is the focus of one of the chapters in a fascinating new e-book, Shaping Africa’s Post-Covid Recovery. In nearly half of sub-Saharan African countries for which there is data, interest payments will account for more than 10% of revenues in 2021 (and above 20% in Angola, Ghana, Kenya, Nigeria and Zambia). For four countries (Angola, Gabon, Ghana and Zambia) interest payments will be larger than health expenditure.

There is bad news for countries that are struggling with debt. Fitch ratings explained that governments seeking to use the G20 “Common Framework for Debt Treatments beyond the DSSI” would be treated as having a distressed debt exchange. This can lead to immediate rating downgrades, as was the case with Ethiopia in February. A concern with the Common Framework is that it only provides limited reductions in the net present value of debt as it excludes “haircuts” or writing down some of the value of creditors’ holdings. The Common Framework risks being the worst of both worlds for debtor governments, coming with an immediate cost (a ratings downgrade) but little payoff (in terms of only a limited impact on debt). We are in danger of repeating past mistakes with debt restructuring being “too little and too late”.

Taxing ‘bads’

Many countries will be looking for ways to increase revenues. Carbon and ‘health’ taxes would be a sensible place to start, providing an incentive to reduce harmful consumption as well as raising revenue.

Recent OECD analysis finds that 15 LMICs could on average generate revenues of around 1% of GDP (increasing tax-GDP rations by around 5% on average) if they set carbon taxes on fossil fuels at rates equivalent to $36 per tonne of CO2. However, the concern that these taxes will raise the prices of basic goods and services makes them politically contentious (£). It is possible citizens that are more likely to accept these reforms when they trust government. And if so, linking such tax increases to the maintenance of emergency expansions in social protection programmes – which were established in response to the pandemic – may provide a unique policy window for this reform. A recent rapid synthesis for the Foreign, Commonwealth and Development Office explores the pros and cons of carbon pricing in developing countries.

A new working paper from the Centre for Global Development (CGD) finds that excise taxes on the consumption of tobacco, alcohol and sugary drinks would not just have clear health benefits, but could also raise around 0.7% of GDP in revenues in LMICs. The authors call for the International Monetary Fund and World Bank to do much more to promote health taxes.

The rapid growth of the digital economy – especially during lockdown – has led many countries to look at whether this is being taxed fairly. An International Centre for Tax and Development paper looks at the specific challenges African countries face in taxing the digital economy. A new World Bank book argues for a digital data tax and a UN Global Internet Tax Agency to provide a forum for global agreement and technical assistance on digital taxation.

UNU-WIDER’s latest release of the Government Revenue Dataset (GRD) is out. It remains the most complete source of cross-country revenue data available, covering over 190 countries for four decades up to 2018. The update highlights varying trends of regions prior to the pandemic. While South Asia’s revenue collection was on a steady upward trend, it was close to stationary in sub-Saharan Africa.

Bottom-up monitoring of service delivery

PFM systems usually focus on top-down monitoring of spending on service delivery, through mechanisms such as performance indicators and ex post audits. However, in many sectors, there is also significant investment in bottom-up monitoring by communities or civil society organisations. This is likely to be at least partially due to the weaknesses in audit process highlighted in the Global Report on PFM.

But does bottom-up monitoring work? A classic 2007 study in Indonesia (PDF) found that central government audits were more effective than community monitoring in reducing corruption in village road projects. More recent evidence has found that a mobile phone app to encourage citizen oversight of school construction projects in Brazil had no effect on whether projects were completed on time. Similarly, the scale-up of a landmark study (PDF) on social accountability in rural health delivery in Uganda failed to find the same benefits.

A recent study in Peru found that where the Office of the Comptroller General and a civil society organisation cooperated in monitoring the execution of public works, this led to a 15% reduction in costs. As well as a civil society organisation (CSO) writing to districts to inform them of the monitoring, the Office of the Comptroller General also wrote to say it was actively coordinating with the CSO. In Uganda, promoting public participation in meetings to hold local governments accountable increased the quality and quantity of some public services, although this varied across different sectors. And while these effects were larger for households in remote areas, they disappeared over time.

These studies provide further support for the idea that bottom-up participation might work best when supported with top-down supervision. In Ethiopia, some evidence (£) suggests that blending top-down and bottom-up monitoring can improve access to health and primary education, especially for the poorest households. Overall, these results suggest that the impact of bottom-up monitoring is highly localised and may depend on local conditions and the specific type of intervention.

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