Public finance and development: six things to read in April

13 April 2018
Insight
Loans and repayment schedules, Mumbai, India.

Spring is upon us meaning the world’s finance ministers will soon be meeting at the International Monetary Fund spring meetings with concerns over debt likely to be high on the agenda.

The rising threat of a debt crisis in low income countries

Debt levels in low income countries have been gradually rising since the global financial crisis, but in the last five years this trend has accelerated. According to research for the International Monetary Fund’s latest World Economic Outlook, median country public debt levels increased to 47 percent of gross domestic product (GDP) last year, up from 33 percent of GDP in 2013. Concern is growing that another debt crisis may be around the corner. Indermit Gill and Kenan Karakülah present a particularly gloomy prognosis of the sustainability of Africa’s debt, with the interest being accumulated on debt rising faster than the size of the economy.

The composition of debt holdings of countries vulnerable to crises is very different in comparison with the situation in the late 1990s. Rarely does a month goes by without the financial press reporting on a sovereign debt issuance from emerging markets. Chinese lending is also often in the spotlight: IMF researchers have recently estimated overseas lending by Chinese banks and their exposure. Greater borrowing on commercial terms, rather than from official sources, means resolving any potential debt crisis will be much more complex than the debt relief efforts in the late 1990s.

Fiscal councils: watchdogs or lapdogs?

A major recent innovation aimed at containing borrowing has been the rise of independent fiscal councils. Unlike independent central banks, fiscal councils are advisory bodies: they do not tend to have policy making-powers. This new e-book questions whether ‘toothless watchdogs can effectively prevent harmful policies’ with a useful summary of the theory and implementation experience to date. One of the contributors to the volume, Simon-Wren Lewis, has also written about the limitations of fiscal councils under authoritarian regimes – which should serve as a cautionary note before governments and international organisations rush to replicate fiscal councils across the globe.

Zimbabwe’s commitment to an accrual-based accounting system

Public Finance International reported this week on the government of Zimbabwe’s ‘commitment to implementing an accrual-based accounting system to enhance transparency and accountability. This development comes as the CIPFA [Chartered Institute of Public Finance and Accountancy] and the IFAC [International Federation of Accountants] are in Zimbabwe at an ongoing stakeholders’ roundtable on Zimbabwe’s migration to accruals.’  

I do not know the specifics of Zimbabwe’s public finance system, but a cynic might suggest that a move to accrual accounting is more in the interests of the accounting profession than the people of Zimbabwe. Even in countries with well-developed financial management systems the benefits of accrual accounting are not clear cut; as highlighted by the German Supreme Audit institution. Major development partners have recognised that the blanket promotion of best-practises have failed. It’s also by no means guaranteed that the reform will enhance transparency as intended. As one accountant put it to me ‘there are two ways to hide information – one is not to publish it, the second is to hide it in financial statements of 150 pages’.

Taxation and the social contract

Much has been written recently about how important taxation is to development. This open access journal on fiscal policy, state-building and economic development has a series of articles that are worth exploring. They look to better understand the structural drivers of the capacity to collect taxes in developing countries. A common theme raised by the authors is that the capacity to collect taxes depends on the social contract between states and tax payers.

But it is not always clear how such as contract could be built: we still don’t have a good understanding of the links between state legitimacy, inequality, service delivery, and tax compliance. An article from Tanzania finds that where voters were given information in ‘morally charged terms’ on the use of tax havens by the elite, it led to a reduced intention to vote. A new Afrobarometer paper suggests that governments wanting to improve willingness to pay taxes could usefully focus on providing a stable power supply. They show how citizens’ attitudes to paying tax improve as access to electricity improves.

The implementation of OECD base erosion and profit shifting (BEPS) reforms in developing countries

Concerns have been raised that the BEPS reforms package prepared by the OECD may not be consistent with the needs of developing countries. This GIZ paper provides some useful survey evidence from tax authorities on their priorities, experiences and challenges in implementing this package of reforms. Section 3 of the report – that summarises the survey findings from tax authorities – is particularly worth a look. There seems to be a disconnect between much of the rhetoric around international taxation and the day to day concerns of tax officials.

Are value-added tax exemptions a good way of protecting societies’ most vulnerable?

Many governments use reduced rates or exemptions from value-added tax as a means of protecting the poorest in society. For instance, governments offer reduced VAT on food because food makes up a large proportion of spending for the poorest in society. This new draft paper, from the Institute of Fiscal Studies’ (IFS) TAXDEV programme, provides new evidence from Ethiopia, Ghana, Senegal and Zambia to show that cash transfers or a universal basic income might be a more efficient way of protecting society’s poorest. This is because reduced value-added rates tend to be most beneficial (in absolute terms) for the richest in society because they consume a lot more VAT-exempted items, even if doing so takes up a much lower proportion of their overall income.  The IFS is cautious in promoting policy changes – and is right to be. Most existing cash transfer schemes are targeted in some form or another, but face significant challenges in correctly targeting the poor. VAT reform without social protection reform risk making the poor worse off.

The Institute of Fiscal Studies has been making similar points about tax policy in the UK for a number offor years. People familiar with the ‘pasty tax’ (a proposed removal of the exemption on pasties) will be aware that more economically efficient tax and transfer systems are not always politically popular. There are, however, growing lessons out there on how to implement changes to tax and transfer systems effectively. Recent papers on India’s energy subsidy reforms and Indonesia’s fuel subsidies are nice examples.

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