Public finance and development: five things to read in October

30 October 2018
Insight
Loans and repayment schedules, Mumbai, India. Photo: Simone D. McCourtie / World Bank CC BY-NC-ND 2.0

Halloween is upon us. The theme has been a feature of the UK’s budget announcement this week, with the Times of London using the headline: ‘Fiscal Phil plays trick or treat’.

For an international audience, perhaps the two most interesting decisions were to stop public private partnerships (PPPs) in England (called private finance initiative projects in the UK) and to introduce a digital services tax on large technology firms. I discuss attempts to tax the digital economy in other parts of the world below, and will look at the decision to stop using PPPs in more detail in next month’s round-up.

The rest of this month’s round-up looks at the use of public sector balance sheets to assess fiscal performance; the debate around public sector accounting standards; and the fiscal policy challenges created by technological changes.

How should we measure government fiscal performance?

The IMF's latest Fiscal Monitor report 'Managing public wealth’, argues that public sector balance sheets should be used to measure government fiscal performance.

Unlike narrower measures – such as the budget deficit – balance sheets could reveal the true consequences of fiscal policy by showing whether debt-funded borrowing is translating into investment and if public assets are being sold to provide short-term financing for a deficit.

The report reviews public sector balance sheets for 31 countries – across all income categories – and ranks them by net financial position. Coverage of the report in the UK focused on the UK’s ranking: towards the bottom.

But the report also highlights a particular challenge for the low-income countries included such as Tanzania and Uganda: a foreign currency mismatch between liabilities – debt in foreign currency – and domestic currency assets.

Rising public debt in many African countries is the topic of our conference next week, so tune in for more analysis on this issue.

Progressive universalism to meet the challenges of economic change

In his Brookings article, Shanta Devarajan, Acting Chief Economist of the World Bank, highlights some of the policy implications from the 2019 World Development Report, The Changing Nature of Work.

He explains that social protection (or social insurance) systems need to change to match technology-driven changes in labour markets and the rise of the ‘gig economy’ by delinking them from employment status. They should also embrace ‘progressive universalism’ by prioritising a guaranteed minimum level of social assistance for the poorest – and then progressively expanding toward universal coverage.

This concept has been adopted from discussions of how to reach universal health coverage (UHC). A recent article by a World Bank team takes stock of health spending in eastern and southern Africa over 2011–2013.

It concludes that governments are not prioritising health in their budgets – which is inconsistent with their commitments to reach UHC. Health spending has increased more slowly than GDP growth, although health spending in these regions remains higher than for sub-Saharan Africa as a whole.

The article also notes significant discrepancies between different data sources (the World Health Organization’s Global Health Expenditure Database and World Bank Public Expenditure Reviews) and calls for strengthened national data collection and international efforts to ensure consistent and comparable data.

Taxing the digital economy to finance social policy

The same technological changes that are changing labour markets have created large digital firms and incentives for tax avoidance. Devarajan notes that this will only be corrected through cooperative action across countries.

While the focus of OECD countries, including the UK, has been on the taxation of the tech giants (or FAANGs -  Facebook, Apple, Amazon, Netflix and Google), several African countries are proposing increased taxes on the consumers of digital services.

Cote d’Ivoire, Kenya and Uganda have introduced or increased excise taxes on mobile money transfers. Benin, Kenya, Uganda and Zambia have proposed levies on social media use of mobile internet bundles. In Benin and Zambia these have not been taken forward. While the Ugandan government argues that revenues raised will be invested in infrastructure to improve services, the perception that the objective is to stifle dissent has led to protests.

Major VAT reform in Zambia?

These are ‘nuisance taxes’ which may do more to damage economic activity than to raise revenues. But a more important major tax policy change may be on the horizon in Zambia.

Last month the country’s Minister of Finance announced in the budget speech that it would abandon its VAT – introduced in 1995 – and revert to a sales tax from April 2019. The rationale is apparently to avoid problems with VAT refunds.

Grieve Chelwa picks apart the details of the VAT and suggests that the Zambian economy’s heavy reliance on the mining sector may make the issue of VAT refunds more challenging for the Ministry of Finance to handle.