Public finance and development: four things to read in July

19 July 2018
Insight
Loans and repayment schedules, Mumbai, India

Our July round-up of things to read on public finance and development is here. I will be taking a break to go on shared parental leave, and the round-up will be taking a well-deserved summer break in August, but it will be back in September with my colleague Tom Hart continuing to provide this resource.

What Brexit and the NHS can teach us about the limits of fiscal transparency

Last month, the British Prime Minister Theresa May announced an increase in National Health Service spending to be funded by a ‘Brexit dividend’. This claim contradicted the forecasted decline in available public finances from the Office of Budget Responsibility (the UK’s independent fiscal council upon which the national budget must be based).

This is despite the UK having on paper one of the most transparent systems of fiscal governance in the world. A recent IMF fiscal transparency evaluation found that the UK had an ‘unprecedented 23 principles at the advanced level’.

Yet getting reliable information to the public on this issue has been something of a battle. In the immediate aftermath of the Prime Minister’s announcement, there was a robust response to these claims from certain research organisations (like the Institute of Fiscal Studies) and from certain media outlets (like the Financial Times). Part of this response is pointing out the government’s own independent fiscal watchdog rejects Mrs May’s claims. Despite this, it is likely that sections of the population would have seen these initial claims go largely unquestioned.

Revising the IMF’s public investment management assessment

Last month, the International Monetary Fund published a review and update of its public investment management assessment. Since its launch in 2015, the assessment has been used in 30 countries to understand whether governments have the appropriate institutions in place to deliver efficient investment spending.

In a previous ODI paper, we had suggested that the IMF assessments were too focused on upstream budgetary processes. It is a positive development that the revised framework looks to bring out more clearly ‘downstream’ issues including procurement and maintenance of assets. The updated assessment also tries to better reflect the reality that a large proportion of investment is managed through subnational governments and public corporations.  

But as international organisations start to mobilise funds and reform programmes around these assessments, it should be recognised that this remains quite a stylised view of the key drivers of investment efficiency. The assessment continues to be biased towards issues primarily under the oversight of finance ministries (e.g. medium-term budgeting, budget comprehensiveness, regulations on reallocations of funds) even though the evidence is not as strong as it might be that such procedures are necessarily the key problem in getting more effective investment spending.

How much do we know about the impacts of transfers from central to local government?

How do grants affect tax collection? A common concern is that when central government provides grants to local governments, the local government will have less incentive to raise taxes locally.

This study in Tanzania finds that intergovernmental grants to rural government actually facilitate revenue generation rather than undermine it (this in line with similar findings from Benin, Cote D’Ivoire, Morocco and the Philippines). The author Takaaki Masaki suggests this is because administrative capacity is a major constraint and so additional revenue from central government can help to address those weaknesses.

A further paper finds that intergovernmental grants in Brazil follow political connections. Where a minister from a new party comes in to post, city mayors in the same party as the minister are more successful in their grant applications. This may have negative implications from an equity perspective, but contrary to what one might expect, ‘politically connected’ investments do not seem to perform more poorly than those that are not awarded on a partisan basis.

Taxation and financing the sustainable development goals

The Addis Tax Initiative that came out of the Sustainable Development Goals (SDGs) financing conference in 2015 saw many donors committing to double the resources available for technical cooperation to strengthen tax systems. But technical support for strengthening tax systems is not new: international actors have been giving advice on how developing countries should levy taxes since before the second world war. This new ODI paper provides an accessible summary for practitioners interested in tax reform, who might not be familiar with the key academic debates that have underpinned the evolution of current international advice.

However, Nancy Lee from the Center for Global Development (CGD) suggests that increased technical cooperation for improving taxation is unlikely to be sufficient on its own if countries are to reconcile the enormous financing needs of the SDGs with the need to keep debt at sustainable levels.  She proposes linking the concessional lending of multilaterals to increases in tax to GDP ratios as an alternative approach to incentivise increased revenue collections. There is some precedent here. IMF macroeconomic programmes have made use of revenue conditions in the past with some success in raising the amounts of revenue collected.

Ultimately the impact of greater revenue collection on prosperity and equity will depend on both how additional funds are raised and also how that money is used. Understanding the incidence of tax and spending is very difficult in countries with limited information on where various revenues come from and weak statistics. This briefing note from Wilson Pritchard is a pragmatic outline of what an agenda for equitable taxation might look like in such contexts.  

And it is not only taxes collected that affect equity, but also the taxes that are foregone as a result of the tax exemptions granted by government. This set of resources from the International Budget Partnership in Latin America provides an accessible guide for thinking through the distributional impacts of tax expenditures.