Public finance and development: eight things to read in April

15 April 2019
Insight
Loans and repayment schedules, Mumbai, India. Photo: Simone D. McCourtie/World Bank CC BY-NC-ND 2.0

Kenya’s tax treaty with Mauritius ruled as ‘unconstitutional’

The Kenyan High Court’s ruling last month that declared the double tax agreement between Kenya and Mauritius as unconstitutional has been described as ground-breaking and unprecedented.

The case brought by the African Tax Justice Network argued that the treaty would lead to an unacceptable loss of revenue and that it should have been subject to public consultation and approval by parliament.

Greater critical scrutiny of tax treaties with ‘investment hubs’ (often dubbed tax havens) is a good thing. There is growing evidence that they have not led to expected increases in foreign direct investment, but at the same time have contributed to significant reductions in corporate tax receipts.

Revising corporate taxation in the global economy

The breadth and variety of responses to the OECD’s consultation on the next stage of its proposed reforms to international rules on corporate taxation gives some sense of the complexity of its task at hand. This IMF policy paper provides a useful outline of the key proposals under debate and areas of contention.

For anybody looking for an introduction to some of the challenges of reforming international tax systems, this recent podcast from the Peterson Institute of International Economics gives a good flavour, even if focused on the US.

This blog by Christine Lagarde is indicative of a growing consensus about the need for more radical reform than has been seen to date. Sol Picciotto provides a useful overview of the key factors behind this ‘new mood for reform’, including broader representation, more open engagement from the private sector and a greater recognition of the needs of poorer countries.

How best to support tax and spending policies that promote gender equity?

Last month saw the Secretariat responsible for Public Expenditure and Financial Accountability (PEFA) assessments launch an open consultation on a proposed new gender module aimed at assessing the gender responsiveness of governments’ public financial management systems. This builds upon building global momentum to include women in government budgets.

Promoting greater gender equity is clearly a desirable goal, but a recent blog from an ODI colleague questions whether the new PEFA module is the most appropriate instrument for supporting that goal. If making changes to budgeting systems is seen as the key priority, there's a risk that attention is shifted away from broader policy-making processes as well as the policies themselves.

This critique of the PEFA module is symptomatic of a broader problem that ‘gender-responsive budgeting’ has been used as a catch-all term to describe both a desirable goal (tax and spending policies that promote greater gender equity), but also associated with quite a specific set of reforms to budgeting processes in order to achieve that goal. We should be fully supportive of the first objective, but much more cautious in prescribing specific institutional solutions to get there.

Reviewing the impacts of an exit from aid

Over the past 15 years, 35 low-income countries have transitioned to middle-income country (MIC) status. This ‘graduation’ is obviously good news, but this move to MIC status can have major implications for both the amount and composition of financing available to governments. This new ODI study provides the first systematic look at how this transition is impacting countries.

The research finds impacts both on the finances received – in most cases the amount of financing available has not fallen, but there has been a shift from grants towards loans – but also in the allocation of resources, with a shift away from social sector towards financing infrastructure.

Investing in human capital at the subnational level

A collaboration between Development Initiatives and ODI looks at what data is available on government and donor spending at the subnational level (for health and education) and how well public finance is targeted to the poorest people at subnational level. 

The authors find little evidence from publicly available data that either government or donor funding allocations are reaching the poorest regions – and that data on how finance is allocated at the subnational level is hard to come by.   

Fiscal policies for climate action

The World Bank has published a very useful new volume on fiscal policies for climate action. The first part of the book focuses on the role environmental tax reforms can play in mitigating climate change, but also in increasing welfare.  It combines economic analysis with useful guidance on how to implement what can be politically treacherous reforms (as Emmanuel Macron can readily testify). 

The second part of the book looks at the role of fiscal policy in building resilience to the increased risk of natural disasters. The authors present a model that suggests early investments to support adaptation are less costly and more effective than paying for relief after the fact (or indeed doing nothing).

Notwithstanding the economics, investing in climate change adaptation is again not an easy sell to tax-payers, especially if you live in a poorer country that has contributed little to climate change.

Reforming public service in post-conflict countries

Another World Bank publication merits reading for anyone with an interest in supporting public service reform in post-conflict countries. It is a refreshingly frank reflection on the gaps between the realities of how post-conflict states operate and the ‘first-best’ solutions put forward for reforming the public sector. 

The authors highlight three really useful lessons. First, there is no ‘blank slate’ in post-conflict environments. Institutions are ‘sticky’ and so well-established norms and behaviours need to be navigated.  

Second, the awarding of public jobs is a necessary currency for ensuring fragile peace coalitions hold. Expecting ‘best practices’ such as merit-based recruitment to somehow put an end to such practices is naïve.

Finally, there is also a call to think longer-term, particularly with respect to the dangers of setting up parallel structures in governments as a way to generate short-term improvements.

2019 Conference at the Centre for Studies on African Economies

I will not attempt to summarise the public finance-related papers presented at the 2019 conference at the Centre for Studies on African Economies. It is already done very nicely by David Evans here.

If you would like to sign up to receive the public finance resources round-up regularly, please email Mark ([email protected]).  

We are also hiring positions to work on taxation and PFM and health and fiscal decentralisation. Applications close on 21 April.

This is an output of the following project: Public finance and development: monthly round-up blogs

Authors

Senior Research Fellow – Head of Programme (acting)
Mark’s research focuses on how the international community engages on questions of public finance [...]