Unlocking Public Resources for Development:

Meeting the SDGs

The New Development Goals:Sustainable Development Goals 2016-2030

No Poverty No HungerGood Health and

Well-BeingQuality Education

Clean Water and SanitationGender Equality Affordable and

Clean EnergyDecent Work and Economic Growth

Industry, Innovation and Infrastructure

Reduced Inequalities

Sustainable cities and Communities

Climate Action

Responsible Consumption and

Production

Life on LandLife Below Water Peace, Justice and strong Institutions

Partnerships for the Goals

Source: Sustainabledevelopment.un.org (2015).

Financing for these goals?1. ODA (Official Development Assistance) = external public financing from donors to low/middle income countries

2. Private sector 3. Public Sector

But countries need to go “from Billions to Trillions” to finance the SDGs…HOW will the developed and developing world do this?WHERE will poor countries find trillions?

The world needs a new structure to unlock its resources Domestic Resource Mobilization

Domestic Resource Mobilization = countries generating and spending their own resources for sustainable development

Reduces vulnerability and dependency on external aidCost effective → estimated $20 return for every $1 invested in DRM

programsDRM has more potential than ODA → a more than 5 times increase in

domestic resources in the 54 Sub-Saharan African countries VS a 3 time increase in ODA from 2000 to 2011.

Domestic ResourceMobilization

Public Sector

So…

Higher Tax-GDP ratios for higher public spending

• An overall increase in tax-GDP ratios since the 90s for most countries with ½ of all developing countries having rations above 15% → outstanding room for improvement in the other ½

• According to the UN, developing countries will have to increase their tax revenue to 20% of their DGP

Source: Ploumen, L., 2015 and Development Committee, 2015

Reaching this ratio requires resource mobilization in terms of:1. Better tax administration strategies & exchange of information (EOI)2. Higher levels of VAT3. Effective fiscal decentralization 4. Reduce/revise energy subsidies 5. Eliminate illicit financial flows6. Attract private investments7. Reduced dependency and enhance faith in the government

1. Better tax administration strategies & exchange of information (EOI)• Adoption of modern technology for faster and simpler tax payment and

collection

• Complete registration of all taxpayers in the system

• Efficient filing and auditing in businesses for faster tax payments

• Accurate determination of tax liabilities and strict penalties Information access to augment the enforcement capacity of national tax administrations, i.e. taxing residents’ holdings of assets abroad

Application?

El Salvador increased its tax-GDP ratio from 11% to 14% through tax administration changes, e.g. increased tax collections

Nigeria is estimated to earn approximately $1 billion per year from more efficient auditing and business registration.

The IMF with other organizations have created the Tax Administration Diagnostic Assessment Tool (TADAT) to evaluate and strengthen administration practices enabled Zambia to acknowledge its reform needs and priorities.

Source: Usaid.gov, 2015

2.Higher levels of VATSignificant scope for improvement since most of the developing world is still new to the idea of VAT…

The spread of VAT

Source: Fiscal Affairs Departments, 2011

VAT conditionsVAT is one of the least harmful methods to raise revenue in terms of the influence on citizens’ economic activity if compared to other ways, e.g. income tax, and considers equity issues.

Criteria• Simple and stable procedure over time• Strict penalties for effective enforcement• Good administrative review system

• Bangladeshi VAT has reached 15% after only 18 years in force → one of its major contributions to revenue with potentials to have higher rates.

• Nigeria has a target of doubling their 5% VAT since it is relatively very low for the billions they want to achieve for the SDGs.

Source: Smith et at., 2011

Applications?

3. Effective fiscal decentralization The mobilization of resources/responsibilities from the federal to the local governments of a country to encourage incentives for local creation of resources.

Study shows the efficiency benefits:• Local governments have more information about their people’s needs

→efficient resource allocation through spending• People will choose the best local government → competition for

better utilization of resources

Source: Ebel and Yilmaz, 2002

Application?Nigeria acknowledges the importance of decentralization since more than half its total resources are utilized by the federal government with the rest of the local governments sharing the rest.

However political conflict should be removed → recent history has shown decentralization failing to achieve its benefits due to loss of stability when the governments have conflicts.

Source: Syamsul, 2003

4.Reduce/revise energy subsidies • Often these subsidies benefit more the middle class rather than the

poor people.• Globally, it is estimated that subsidies cost US$ 1.9 trillion with energy

subsidies alone at US$ 300 billion.

Application?Indonesia reduced its fuel and energy subsidies from 2.4% to 0.8% of its GDP and used these resources to improve infrastructure.

5. Eliminate illicit financial flowsThis includes tax evasion, criminal activity and public corruption.The tax gab must be calculated and analyzed to find which sectors and what types of these actions are occurring.

Application?The USAID program managed to reduce the taxpayers with “gifts” from 39.3% in 2005 to a shocking 8.4% in 2008 in Georgia, after a series of zero-tolerance policies in corruption and tax reforms increased Georgia’s tax revenue by 12% of its GDP

Source: Runde and Savoy, 2014

6. Attract private investmentsEfficient tax revenue strategies reflects minimal costs on the private sector.Also, less complex structures such as stable tax legislations reduces businesses costs of annually revising their costs.

Application?Somalia has announced “Best practice for tax administration is also best practice for businesses” → more stability means more predictable environments and costs for firms.

Source: The Economist, 2015

7.Reduced dependency and faith in the governmentCountries with strong tax systems are less dependent on external aid, they are in control of their own decisions and can provide for their own people.

Application?High-Level Meeting, 2014: Mexico City announced that lack of transparency → reduce citizens’ willingness to follow tax rules and it suppresses the confidence in the system.

Source: Runde and Savoy, 2014

Other targets besides high tax-GDP ratio sustainable development by the public sector?

Creating fiscal space through efficiencyConverting all available resources the country has generated into long-term development.Efficiency involves removing low priority or faulty-designed spending for more available resources. More systematic controls and measures of the effectiveness of the current strategies and policies.

Application?Costa Rica has loses of 0.5% of its GDP on dropout rate costs in education → suggestions to turn this cost into resources by reforming regulations on hiring, firing and student per classroom.

Challenges?

Capacity = there is only a finite level of goods and services a country can produce over a period of time.

Capture = only the narrow interests of the people in power capture the resources of the country without citizen engagement.

Corruption = dishonest dealings by those in power, exploiting the country’s resources for their own benefits.

Tax avoidance activities = the legal minimization of tax liability through several techniques.

Sub-national governments rely heavily on transfers from the central government to begin with → lack of flexibility for decisions.

Poorly motivated staff = improved tools are useless when the people who use them are inefficient.

Uniqueness = each country will respond differently to each measure so the ideal combination has to be identified.

Sources

Development Committee. (2015). FROM BILLIONS TO TRILLIONS: TRANSFORMING DEVELOPMENT FINANCE POST-2015 FINANCING FOR DEVELOPMENT: MULTILATERAL DEVELOPMENT FINANCE. [pdf]. Available at: http://siteresources.worldbank.org/DEVCOMMINT/Documentation/23659446/DC2015-0002%28E%29FinancingforDevelopment.pdf. Last accessed 9th Dec 2015.

Ebel, R. D., Yilmaz, S. (2002). Concepts of Fiscal Decentralization and Worldwide Overview. [pdf]. Available at: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2004/11/02/000090341_20041102092746/Rendered/PDF/303460Concept0of0Fiscal0Ebel1Yilmaz.pdf. Last accessed 9th Dec 2015.

Financing for Development Course Notes

Ploumen, L. (2015). Why developing countries need to toughen up on taxes. Available: http://www.theguardian.com/global-development/2015/jul/07/why-developing-countries-need-to-toughen-up-taxes-sdgs. Last accessed 9th Dec 2015.Fiscal Affairs Department. (2011). Revenue Mobilization in Developing Countries. [pdf] Available at: https://www.imf.org/external/np/pp/eng/2011/030811.pdf. Last accessed 9th Dec 2015.

Runde, D, Savoy, C. M. (2014). Paying for Development: Domestic Resource Mobilization. Available: http://csis.org/publication/paying-development-domestic-resource-mobilization. Last accessed 9th Dec 2015.

Smith, A. M., Islam A., Moniruzzaman, M. (2011). Concumption Taxes in Developing Countries- The Case of the Bangladesh VAT. [pdf] Available at: http://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/working-papers/WP82.pdf. Last accessed 9th Dec 2015.

Syamsul, T. M. (2003). Fiscal Decentralization and Economic Development: A Cross-Country Empirical Study. [pdf] Available at: http://www.gsid.nagoya-u.ac.jp/bpub/research/public/forum/24/13.pdf. Last accessed 9th Dec 2015.

Sustainabledevelopment.un.org. (2015). Sustainable Development Goals. Available: https://sustainabledevelopment.un.org/?menu=1300. Last accessed 9th Dec 2015.

Usaid.gov. (2015). DOMESTIC RESOURCE MOBILIZATION. Available: https://www.usaid.gov/what-we-do/economic-growth-and-trade/domestic-resource-mobilization. Last accessed 9th Dec 2015.The Economist. (2015). Tax them and they will grow. Available: http://www.economist.com/news/finance-and-economics/21657433-poor-countries-need-get-better-raising-tax-and-multinational-firms-need. Last accessed 9th Dec 2015.