Public finance and development: six things to read in September

31 August 2017

Welcome to this month’s public finance and development round-up. Drawn from the latest news, blogs and debates in policy circles this is what’s caught my eye since last month’s ‘5 things to read’.

The 10th anniversary of the global financial crisis

August 2017 saw the 10th anniversary of the beginning of the credit crisis. This Vox analysis provides an accessible summary of why the financial crisis happened when it did. Discussing the impact of the crisis, this Financial Times series shows that in mature economies there has been a relative shift in the debt burden from the private sector to government and that with the exception of those in the US, taxpayers are still on the hook for the costs of bank bailouts.

The crisis saw less of a direct impact on the public finances of developing countries, but it has reshaped ideas on fiscal management that are likely to reverberate across country borders. Increased government borrowing is once again more widely (although by no means universally) accepted as a way to stimulate economic recovery (for example, the IMF’s calls for ‘an infrastructure push’). The limitations of overly rigid fiscal rules have been recognised. Greater attention is also being paid to the management of fiscal risks. More generally though, the situation has required crisis-affected finance ministries to revaluate the effectiveness of past reforms and refocus on their core functions to manage public funds and oversee macroeconomic performance.

The race to the bottom on corporate tax

International taxation is also bigger news in the wake of the financial crisis. If the years after the Great Depression were characterised by ‘beggar thy neighbour’ trade policies, today in a world of globalised capital, ‘beggar thy neighbour’ tax policies seem to be a greater concern. This joint IMF/World Bank blog by Michael Keen and Jim Brumby shows the startling decline, in developed economies, of corporate tax rates since 1980. From an average of over 40% to an average of 22% today. Tax rates in developing countries have followed a similar path. To date, the revenues collected have held up (although it’s not entirely clear why) but, surely, if rates continue to fall globally then collections from corporate income tax will also decline. This is a particular worry for lower income countries who are, on average, more reliant on corporate income taxes (16% of total revenues) than their higher income counterparts (9% of total revenues).

Why making sure everybody pays their taxes may not always be a good idea

It is generally assumed that a good tax system is one where compliance gaps are zero (everybody is meeting their legal tax obligations). This Michael Keen presentation (he's having a busy month) at UNU-WIDER’s conference on public economics points out that strengthened administrative processes aimed at closing compliance gaps are not always and everywhere a good thing; they only make sense if benefits exceed costs. The potential benefits of improved compliance need to be considered in conjunction with policy (any increases in tax collected through strengthening enforcement will also depend on the tax rates). This ‘optimal tax administration theory’ might seem self-evident, but is often ignored in the ongoing pursuit of ‘better systems’.

Another index to assess financial management

There is little doubt that indices resonate with governments. Nobody likes their neighbour to be ‘doing better’. But it’s not always so clear-cut what ‘better’ might look like. The IFAC and CIPFA’s recent launch of an accounting index is a case in point. It will 'provide a picture of the extent of accrual accounting and adoption of International Public Sector Accounting Standards … and help stimulate public financial management (PFM) reforms’. Governments should not be adopting accrual accounting because somebody else is doing it, but rather based on their evaluation of the costs and benefits of the changes. This press release shows why the Dutch government did not think the investment worthwhile. Perhaps we need an ‘optimal accounting theory’?

Procurement, competition and corruption

Much of the discourse on public financial management is built around certain mantras, for example, ‘better PFM means improved operational efficiency’, rather than on evidence of how in practice specific mechanisms might work. This Stephen Knack blog describes a World Bank working paper that helps to fill that gap. It looks at the relationship between procurement systems (as measured by PEFA) and competition and corruption (as measured by responses to the World Bank’s Enterprise Surveys). The paper suggests there is more competition – more firms bid for contracts – when government organisations must justify exceptions to the use of competitive methods and when information on procurement is made available to the public. There is less corruption – firms report paying fewer kickbacks – when there are independent, effective complaints mechanisms and comprehensive and timely audits. They find no relationship between the indicator that ranks the legal framework and these measures of competition and corruption; in other words different institutional forms seem to be delivering similar outcomes.

Should donors focus on corruption at all?

It is one thing to observe that better procurement systems limit corruption, it does not necessarily mean that donors can affect those systems. Duncan Green seems sceptical of the ‘anti-corruption movement’ and donor efforts to prevent corruption, ‘I have to say my conclusion was that the sooner aid gets out of the anti-corruption business, and local politics takes over, the better.’ I have some sympathy for these arguments, but I am beginning to wonder whether actually reducing corruption is the primary purpose of these programmes. What if the mere fact of trying to reduce corruption, even if ineffectively, strengthens public support for giving aid to other things that do work. Would that make the investment worthwhile?

The pieces above stood out to me this month. I’d love to hear about any others you’ve found interesting and do get in touch if you have any ideas or suggestions for the future.