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

Written by Tom Hart

Expert comment

See all blogs in our public finance and development series.

This month we bring you some recent publications on the fiscal response to Covid in Africa and Latin America, reflections on lessons from the Washington Consensus, recent work on health spending, and news of a new network on decentralisation.

Fiscal response to Covid in Africa

A recent African Tax Administration Forum publication looks at fiscal responses to the Covid-19 pandemic across Africa. Revenue authorities have had to balance providing economic stimulus or relief and protecting and mobilising revenue to finance the response. Hazel Granger of ODI looks at the role of tax policy at the different stages of response, from emergency relief to fiscal stimulus and consolidation after recovery. Hazel finds that direct spending is likely to be more effective than tax measures, but there may be a case for them where social protection systems are weak and tax bases are relatively wide. Examples include targeted cost-based income incentives and temporary consumption-tax relief, especially targeted at low-income households.

The continuing dual-speed recovery between countries with and without access to vaccines leads to the question of how countries can deal with the fiscal consequences – bigger deficits and higher debt – of the pandemic. A new report from ODI and the Institute for Fiscal Studies’ TaxDev project looks at the options for fiscal consolidation in sub-Saharan Africa.

In Organisation for Economic Co-operation and Development (OECD) countries, Alberto Alesina and co-authors argue that fiscal consolidation based on cutting spending rather than raising taxes has less harmful effects on output and employment (although they were criticised for ignoring negative consequences from expenditure cuts themselves). In contrast, both this report, and a recent Center for Global Development (CGD) blog looking at fiscal tightening in developing countries between 1979 and 2019, find that growth is lower in sub-Saharan Africa when fiscal tightening is expenditure- rather than revenue-based. The CGD blog also finds that expenditure-led consolidation in sub-Saharan Africa is less effective at achieving sustained fiscal rebalancing and reducing debt, and increases inequality more.

So, what tax measures are available? The TaxDev report argues that they should be ones that are least likely to depress demand, such as increases in taxes on personal income and corporate income (which could be made temporary to limit negative effects on investment). Longer-term fiscal consolidation will need to focus on ‘green’ taxes and property taxes, the rationalisation of tax expenditures (e.g. tax exemptions and reduced VAT rates) and administrative reforms and enforcement activities to increase tax collection.

The Washington Consensus revisited

The summer edition of the Journal of Economic Perspectives carries an interesting symposium looking back at the Washington Consensus, which many associate with austerity and expenditure cuts. It includes contributions from former Nigerian Minister of Finance (and current World Trade Organization head) Ngozi Okonjo-Iweala and economics Nobel Prize winner Michael Spence. The Washington Consensus covers a whole range of economic policy areas (often summarised as stabilise, liberalise, privatise), but on the fiscal side, two issues stood out from the symposium.

First, Spence’s endorsement of a greater role for planning to set priorities for policy and development, and setting expectations for the direction of the economy. The case for development planning is also made in a recent review by Alasdair Roberts of work on the results of the abolition of India’s Planning Commission in 2015. The case made is that ministries of finance are too focused on near-term macroeconomic stability and limiting expenditure at the expense of a broader conception of development, including widening inequalities. Without the Planning Commission there is no institutional counterweight to provide a focus on long-term developmental needs, rather than just short-term macro-fiscal ones. Similar arguments have been made in the UK.

The second issue is the need for public spending to address distributional and inclusion challenges. Spence bluntly states that ‘non-inclusive growth patterns generally fail’. As the paper on Africa notes: ‘the ability to implement pro-poor policies alongside market-oriented reforms played a central role in successful policy performance’. This emphasis on how public finance policies can combat inequality is also the theme of a recent International Monetary Fund (IMF) blog on fiscal policy challenges in Latin America. The blog and underlying report argue that rising inequality can lead to unrest that threatens growth. They argue for a gradual fiscal consolidation as well as a new fiscal pact to strengthen social protection and increase the progressivity of public finances.

Health spending during the pandemic

A new International Budget Partnership report on accountability and Covid-19 response spending looks at 400 emergency fiscal response packages across 120 countries. It documents widespread departures from normal fiscal policy processes, such as bypassing legislatures, relaxing procurement procedures and not undertaking citizen consultation. For example, Covid-19 response packages were only approved by parliaments as a supplementary budget, or other type of law, in about half of the countries surveyed.

The report argues that these shortcuts and limitations undermine accountability and create fiduciary risks, and are neither necessary nor inevitable. Examples of better practice, which maintains transparency and accountability even during an urgent crisis response, include regular reports on policy and budget implementation (including to parliaments), disclosure and publication of all emergency procurement contracts, expedited audits of emergency spending programmes and proactively seeking public input to improve the design and implementation of emergency response packages.

Complementary to this focus on transparency and accountability, a new study finds that democracies are more likely to maintain government health spending, even during downturns, and this is especially true in low-income countries.

The World Health Organization (WHO) has released a useful new guide on health financing for the Covid-19 response, including advice on issues such as what needs to be financed, how it can be financed – including areas where potential savings can be made – and potential public financial management (PFM) reforms to facilitate an effective emergency response.

Research from the Toulouse School of Economics finds that centralised procurement of drugs can allow governments to obtain lower prices and discounts on larger quantities, a 15% saving on average in the seven low- and middle-income countries studied. However, the size of the effect gets smaller the more the supplier market is concentrated.

Why do input controls last?

Few ideas have permeated the debate on public finance as deeply as the need to focus government spending on outputs, not inputs. Efforts to introduce programme budgeting have been around for nearly 80 years, and this is a central theme of health financing discussions in many low- and middle-income countries today – as shown in the WHO’s latest case studies on programme budgeting in the health sector from Ghana and Uganda. But a new article from Christopher Hood and Barbara Piotrowska explores why input controls are maintained even in high-income countries such as the UK. They argue that output controls were implemented when political and economic conditions were favourable, only to fall away when fiscal consolidation makes output targets harder to meet. In contrast, input controls proved to be politically useful in both good times and bad.

Yet, Hood and Piotrowska note that the ability to ‘let go’ of input controls needs to be built on strong foundations, including confidence that the internal controls within spending agencies will prevent significant mismanagement. One of CABRI’s new capabilities assessments suggests this was probably not the case for Ethiopia, where programme-based budgeting was accompanied by a rise in adverse audit findings.

Fiscal decentralisation and service delivery

Local governments play a key role in managing public spending and delivering services in many countries, so we are excited to see the launch of the Local Public Sector Alliance (LPSA) and Decentralization.Net, a global network aiming to engage policy-makers, researchers and specialists from various sectors and disciplines around issues of decentralisation and localisation. We’re particularly looking forward to the webinar series ‘Decentralization and Local Development around the World 2021–2022'. The first one, on Asia, took place last week, and with the second one on sub-Saharan Africa in December, we’re hoping to contribute with some of our recent research on fiscal decentralisation, including:

On being and becoming a development expert

We leave you this month with the reflections of Harvard and the World Bank’s Michael Woolcock on the potential and limits of ‘being and becoming a development expert’:

technical expertise is real, rare, its application deeply necessary and consequential, and for certain kinds of development problems, exactly what you need. For other kinds of development problems, however – and certainly the bulk of those problems associated with building state capability – routinely prioritizing the singular deployment of a narrow form of technical expertise as the optimal solution is itself part of the problem.