Generating Public Revenue to Build Resilient Economies
By Christine Lagarde, IMF Managing Director
Dubai, UAE
Dubai, UAE
February 13, 2017
Good morning—Sabah Al-Khair.
Ministers and Governors—thank you for the honor to speak before such a distinguished audience.
I am delighted to join you here in Dubai for the second Arab Fiscal Forum, after our successful first meeting a year ago.
I would like to express my sincere gratitude to Minister Al-Tayer for being such a generous host, and to the Arab Monetary Fund and Dr. Al-Hamidy for joining hands with the IMF in organizing this important event.
Let me start with some good news. After many years of feeble growth, the IMF is expecting global economic activity to pick up this year and next, and across both the advanced and emerging economies.
However, this does not mean we are out of the woods: conflicts and lower oil prices will continue to affect growth and, by extension, also government revenue. While oil prices have increased recently, we do not expect them to return to levels we have seen before 2014. And there are, of course, questions about geopolitical developments in many regions of the world.
In the face of such uncertainty, countries need to build resilience. Robust public finances are one way to create such resilience. Indeed, governments in this region and elsewhere need to increase their efforts to create a stronger and more reliable stream of revenue.
With this in mind, let us pick up on the conversation we began last year about building 21st-century economies and generating higher government revenue in a rapidly changing environment.
As the Arabic proverb puts it: “A tree begins with a seed.”[1]
So, today I would like to pose the question: how can countries build tax capacity to sow the seeds of a healthy and inclusive economy, for the benefit of all citizens?
The momentum toward revenue mobilization, and the associated work going on at the international level, present the region with a major opportunity. By creating state-of-the-art tax systems, countries can generate resources needed to tackle future challenges—and do so in an efficient and equitable manner.
This, of course, requires a clear and comprehensive strategy that interlinks tax policy reform with revenue administration reform. In other words, what and whom to tax should go hand in hand with how you go about collecting these taxes.
1. Tax policy reform
Let us begin by looking at the steps needed to design a comprehensive tax policy. We at the IMF think that a good first step is establishing a five-to-ten-year revenue target. After that, a comprehensive reform plan is necessary, aiming at long-term institution building rather than short-term fixes. Finally, collecting and disseminating good data is vital for making good decisions.
Revenue targets
Why do we need revenue targets to begin with? Because these are essential goal posts that can help you align your revenues with your spending—both in the short term and the medium term.
A good example is Algeria—where the 2017 budget law for the first time includes a medium-term framework that sets revenue and spending targets for the next three years.
Key tax reform priorities
If tax reforms are to be successful and achieve their targets, policymakers will need to focus their tax policy on key priorities.
In the oil-exporting countries, this means diversifying the sources of revenue away from oil and gas.
As a first step, countries are introducing a VAT and other consumption taxes—for example on tobacco and sugar-sweetened beverages. Over time, governments may also consider deriving additional revenue from income and property taxation.
Countries in the Gulf, for example, are working to introduce a harmonized VAT in 2018. These efforts—which the IMF has supported through is technical assistance—could raise anywhere from 1 to 2 percent of GDP, assuming a VAT rate of 5 percent.
Our experiences in other regions underscore the positive impact of diversification. Mexico, for example, was able to boost its non-oil tax revenue by more than 3 percent of GDP—by broadening the VAT base and raising energy taxes and personal income tax rates.
In the oil-importing countries the key priority is to generate higher revenue by broadening the base of existing taxes. Such reforms would make tax systems simpler, more efficient, and more equitable.
This requires, for example, rationalizing multiple VAT rates and other tax preferences. Some of the key measures here include simplifying the rate structure and getting rid of exemptions, tax holidays and other carve-outs that benefit only a few and create opportunities for arbitrage.
Egypt, for example, last year approved the replacement of the old general sale tax with a new VAT. Once fully implemented, the new VAT will raise 1.5 percent of GDP more in revenue than the old tax.
Another good example is Jordan and Lebanon, where a well-designed and well-administered VAT has allowed for other growth-friendly measures, such as lowering customs tariffs and reducing income tax on labor and capital.
In some countries, tax reform also means making tax systems more progressive—by lifting the top marginal tax rate on personal income. And of course, current tax rules should be applied in a consistent and coherent way.
Transparency
More broadly, fiscal transparency and the sharing of reliable data are essential for the well-being of all countries. Why? Because they increase the accountability of governments and because they can boost the resilience of their economies—and that includes lower borrowing costs.
For example, new IMF staff research[2] shows that greater data transparency—promoted through the IMF data standard initiatives—leads to a 15 percent reduction in the spreads on emerging market sovereign bonds—three months after the improvements are made.
Of course, better data gathering and sharing help policymakers to design reform strategies and implement them effectively.
2. Integrating Tax Policy and Revenue Administration Reforms
This brings me to the second step in designing a revenue strategy—and that is interlinking tax policy reform with revenue administration reform.
This coordinated, simultaneous effort can help countries avoid some of the time-consuming troubles of the past. Traditionally, policymakers would often start with new tax policies and worry about administrative capacity later. By interlinking the two elements right away, countries can “leapfrog” to a more advanced development stage.
Mauritania, for example, took a series of coordinated actions—with the help of the IMF—to simplify and improve its tax system while strengthening its tax administration. This strategy contributed to a remarkable increase in total government revenue—from about 20 per cent of GDP in 2009 to 28 percent in 2014.
So how can this be achieved? By boosting the capacity of tax administration early in the reform process. This is essential to ensure both efficiency and compliance. Based on our experiences in other countries, we see two main priorities.
One is to simplify codes and regulations. This involves not only the laws on tax rates, but also the procedural laws establishing the powers of tax agencies and the rights of taxpayers.
The second priority is to upgrade peoples’ skills and technicalresources to improve tax compliance and enhance services to taxpayers. This is where your countries can take advantage of technological innovations—to “leapfrog” into the digital age.
Modernizing the IT infrastructure—as we see in Saudi Arabia and elsewhere—allows for easier filing and payment by taxpayers, including through mobile technology. It also improves the ability to verify compliance using third-party data.
Another good example is the GCC customs union, where technology has helped collect and administer the common external tariff.
Here I would like to mention that the upcoming Fiscal Forum, in Washington, D.C., will focus on “Digital Revolutions in Public Finance.” I hope all of you can come and join this debate during the IMF Spring Meetings.
3. Drawing on IMF Experience as a Reform Partner
Let me expand now on how the IMF could help with designing and implementing tax reforms and improving revenue administration. Building institutional capacity in countries is, to my mind, one of the most important things we do at the IMF on a day-to-day basis.
Let me give you some examples of what we have done over the past 12 months:
- In Algeria, we have provided advice on how to improve tax compliance and the quality of taxpayer services.
- In Egypt, we have helped the revenue administration to gear up for the introduction of the VAT.
- In Iraq, we have provided a diagnostic assessment of the tax and customs administrations.
- In Jordan, we have helped improve the accuracy of taxpayer data—which can improve tax compliance and reduce tax arrears.
- In Lebanon, we have provided advice on reducing VAT refund fraud, and we have helped strengthen risk management procedures.
In other words, we have been working hard in these and many other countries to meet the increasing demand for our technical assistance and training.
We are immensely proud to serve you—our members. And we strive to do the best possible job—through our staff in Washington and our assets in this region, including the Middle East Technical Assistance Center in Beirut, and the Center for Economics and Finance in Kuwait which on a regular basis offers courses on the issues we are discussing here today.
Conclusion
Let me conclude where I began—with the need to sow the seeds of a more sustainable and more inclusive economy. Your efforts to build tax capacity are vital to achieving that goal. Your economies and societies will reap the benefits of reform.
This means—above all—forging a comprehensive strategy that interlinks tax policy reform and administration reform to generate higher and more reliable revenue.
That will make public finances more resilient and build economies that work of all citizens—here in this region and across the world.
Shukran!
[2] Sangyup Choi and Yuko Hashimoto. IMF Working Paper: “The Effects of Data Transparency Policy Reforms on Emerging Market Sovereign Bond Spreads”, (to be published: 2017).
