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Fiscal challenges, development opportunities?

19-10-2011

Bruce Byiers, ECDPM blog, 19 October 2011.

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Does the current financial crisis simply imply fiscal challenges across-the-board, or does it also present some development opportunities? ECDPM has prepared a Discussion Paper to examine the range of issues relating to taxation and development to feed into this area of the development agenda.

The issue of domestic resource mobilisation has become the focus of increasing attention in developed and developing economies alike with the onset of the financial crisis. Only last week, the European Commission released its Communications on Development Policy and Budget Support both of which prominently featured the issue of the need to help to improve domestic revenue mobilisation in developing countries. In the first it states that “domestic reform and pro-poor fiscal policies are vital”, and “the EU will continue to promote fair and transparent domestic tax systems”, while there is also mention of “international initiatives and country by country reporting to enhance financial transparency” (p. 6).

Further, the consistency of fiscal policy with macroeconomic stability, and tax administration performance in relation to public financial management will both be used as eligibility criteria for budget support. According to the communication, budget support should also be used to promote fiscal sustainability, fair and transparent tax systems, and used to “complement (not substitute) the partner country’s own efforts to mobilise domestic resources” (p. 6). The “conventional wisdom” (and convenient wisdom?) is increasingly that indeed, better taxation leads to better development outcomes.

But clearly it begs the question of “how?”. Are all of these goals simultaneously obtainable? And what does it mean in practice? What are the implications of the interface of international issues relating to aid and finance, regional issues of tax harmonisation and the funding of regional bodies, and national issues of how to promote growth and social goals, promote equity, better governance and democracy, make decentralisation work, and better cope with extractive industry revenues etc.

As outlined in an earlier posting, the Discussion Paper looks at all of these questions based on the five perspectives most frequently employed to address taxation issues. The perspectives are: private sector development, public financial management, state-building, natural resource management and international taxation. The paper then raises 20 key questions for understanding how tax systems and reforms can better achieve their goals, but also therefore, how external assistance might better assist.

Underlying all of the questions is the need to examine issues of political economy, and to be aware of the implications for the day-to-day implementation of tax policy. This includes the need to pay attention to the political economy of the dynamics between government institutions, and between government and donors.

So there are certainly some big fiscal challenges to be faced. But by addressing some key issues, there may indeed be scope to use these as development opportunities.


The views expressed here are those of the author, and may not necessarily represent those of ECDPM.

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Economic Transformation and TradeDevelopment Finance and TaxationTax