Collect More and Spend Better: The Role of Capacity Development

Panelists discussed the role of capacity development in helping governments improve revenue collection and make spending more efficient. They noted that the emphasis on domestic revenue mobilization was demand driven, responding to countries’ interest in raising their revenue collection rates. Panelists highlighted the need for cooperation, including on international taxation issues.

Capacity Development and the IMF

In her introductory remarks, Ms. Grasso underscored the need for more revenue collection and better spending by governments as a key pillar of the Sustainable Development Goals and the Addis Ababa Action Agenda, and noted the role of capacity development in helping countries achieve their goals.

The Managing Director highlighted the Fund’s role in providing capacity development. She pointed out that around 90 percent of the Fund’s membership benefit from technical assistance and training and a quarter of the Fund’s total budget is allocated to capacity development. In addition to the 15 regional training and technical centers, the Fund also provides training through digital means in a number of languages. She stressed that the Fund will continue to increase the range of training courses available online to facilitate capacity building in developing countries. She also highlighted the demand-driven nature of capacity development, noting that the demand for capacity development has increased by 40 percent over the past five years.

Building Better Fiscal Institutions

Birdsall distinguished between ‘individual capacity’ and ‘organizational capability’, noting that public institutions may have capable individuals, but the incentives for efficiency are not there.

Ba highlighted the role of ‘peer learning’ for the better implementation of technical assistance recommendations. Learning from other countries’ experiences contributes to achieving ‘buy in’ from the different stakeholders.

More Domestic Revenue Mobilization and Better Spending

Gaspar noted that empirical evidence suggests that a tax to GDP ratio above a certain threshold is linked to improved indicators of state capacity, legal capacity, and compliance, and a broader taxation base. He underscored the benefits of the double-sided accountability contract that can result from having strong tax compliance and capacity. As taxpayers deliver on their part, taxpayers demand accountability, and governments must account for the use of resources. This creates a virtuous circle. Accountability also enhances distribution and can contribute to better protection for the poor.

Birdsall cautioned against a donor push for increasing domestic revenue mobilization, noting the difference between enhancing the efficiency of revenue collection and simply raising tax rates. She highlighted the difficulty in achieving progressivity through VAT and consumption taxes, which poses an issue of equity, and risks ‘taxing the poor’.

Rudischhauser underscored the need for improving domestic revenue mobilization given that the available ODA resources are insufficient to fulfill development needs. Beyond raising rates, Postel highlighted the need to capture the people who are not covered by the system, while Segura underscored the need to fight tax avoidance. Birdsall noted the challenges of enforcing compliance, particularly of taxes that impact the rich.

Segura emphasized the need to ‘spend better’, including by enhancing the quality of performance budgeting programs, finding operational efficiencies, improving allocation efficiencies, and prioritizing better. He noted that the quality of spending is related to the quality of public goods.

International Taxation

Ba noted the importance of international cooperation, while Rudischhauser noted the need for a change in the international tax system to make sure developing countries are able to collect the taxes that are due to them.

Gaspar highlighted the role of collaboration with other international organizations such as the World Bank, the OECD, and the U.N. on international taxation to develop frameworks that can be applied around the world, including tools for BEPS implementation and joint diagnostics. He noted that the major players in capacity building are joining forces and emphasized the Fund’s constructive engagement in these efforts.

Quotes:

“It is important to distinguish between individual capacity and organizational capability […] as capable people are operating in systems in which the incentives are not there [to be] productive.” --Nancy Birdsall, President, Center for Global Development.

“…what you see when you go above the [tax-to-GDP] threshold is that indicators of state capacity, indicators of tax compliance, indicators of legal capacity become significantly better. […] When you build capacity in a dimension, and it seems tax capacity is special, you actually see significant improvements across the board.” --Vitor Gaspar, Director of the Fiscal Affairs Department, IMF.

“If developing countries raise their tax income by 1 percent, they will raise 1 trillion U.S. dollars in a year. Overall ODA is 100 billion dollars. So just 1 percent more tax income would be 10 times global ODA.” -- Klaus Rudischhauser, Acting Director General, DG-DEVCO, European Commission.

“We need to establish cooperation with all the international organizations—the IMF, the World Bank, the OECD, USAID, and the European Union.  All these international organizations have their role to play in supporting developing countries…and we need to coordinate the work of all these institutions so that we can help our countries to increase the tax base.” --Amadou Ba, Minister of Economy, Finance and Planning, Senegal.

“The international tax system has to change, because as long as the international tax system does not change we will have these illicit flows, we will have tax evasion…We are calling for the international tax system to work better on money laundering, illicit flows, and corruption.” --Klaus Rudischhauser, Acting Director General, DG-DEVCO, European Commission.

“We have substantially reduced tax evasion in Peru, but tax evasion in sales taxes is still estimated at about 30 percent and tax evasion in income taxes is estimated at about 50 percent […] so that’s where capacity building comes in […] and that’s why we have squeezed all the technical assistance possible [from the IMF]” --Alonso Segura Vasi, Minister of Economy and Finance, Peru.