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Fiscal Space, Fiscal Legitimacy and Development
Javier Santiso
Director & Chief Development Economist, OECD Development Centre
G20 Workshop on Fiscal Space for Growth and Social Policy
19-20 June 2008Buenos Aires
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Introduction11
Fiscal Space and GrowthFiscal Space and Growth22
Fiscal Legitimacy and Development Fiscal Legitimacy and Development 33
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The The DevelopmentDevelopment CentreCentre
Bridging OECD and Emerging Economies
Non-OECD members
2008 - 10 members
OECD members
2008 - 23 members
Chile
South Africa
India
Thailand
Egypt
Israel
Brazil
Romania
Vietnam
Colombia
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LEOLEO Latin American Economic Outlook impact
Activities:
•11 seminars organized on topics related to Latin America
•50 presentations at international conferences
•235 press articles published in 18 countries
•17.500 members of LEO’s newsletter
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PartnershipPartnership OECD Centre for Tax Policy & Administration
Mission:
•Providing Technical Expertise to the Committee on Fiscal Affairs by examining all aspects of taxation.
•Covers international and domestic tax issues, direct/indirect taxes, tax policy and tax administration.
•Provide annual comparisons on tax levels and tax structures in member countries.
•Recent work on environmental policy and taxation, taxation and growth.
Enlargement Initiative
Latin American Revenue Statistics Project:
•An initiative to extend the OECD Revenue Statistics methodology to a number of Latin American countries.
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IntroductionIntroduction11
Fiscal Space and GrowthFiscal Space and Growth22
Fiscal Legitimacy and Development Fiscal Legitimacy and Development 33
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GrowthGrowth Understanding Fiscal Space
Fiscal Space
“The capacity of a government to provide financial resources for a desired purpose, subject to the constraint that the fiscal position is sustainable, both over the medium and long-term.”
Heller, P. Introduction to “Fiscal Policy: Fiscal Elements of Growth and Development”. Proceedings of G-20 Workshop. Istanbul, Turkey, July 2007.
“The gap between the current level of expenditure and the maximum level of expenditures a government can undertake without impairing its solvency”
Development Committee of the World bank-IMF Board on Fiscal Policy and Growth, 2006.
The four pillars of Fiscal Space
Source: Fiscal Policy: Fiscal Elements of Growth and Development”. Proceedings of G-20 Workshop. Istanbul, Turkey, July 2007.
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GrowthGrowth Tax structure and channels of growthTaxation
Source: Heady, C. “Tax Policy for Growth.” In Fiscal Policy: Fiscal Elements of Growth and Development”. Proceedings of G-20 Workshop. Istanbul, Turkey, July 2007.
Income taxes and Social Security
Consumption Taxes Taxes on Property and Wealth
Companies
Profits
Households
Specialtax
SSCemployer
SSC employee
Labour income tax
General taxes (e.g. VAT)
Taxes on specific goods and services
Property State tax
Wealth Tax
Capital Income tax
Affected drivers of growth: Employment, Human Capital Formation
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GrowthGrowth Tax structure is a creator of fiscal space
Source: Latin American Revenue Statistics (LARS), 2008. OECD Development Centre, Paris. Based on data from ECLAC and OECD.
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GrowthGrowth Tax Policy and Growth: Implications
•Cutting corporate taxes may promote productivity growth and investment.
Corporate taxes and Investment
Source: Latin American Revenue Statistics, 2008. OECD Development Centre, Paris.
Income taxes
•Reforming top marginal tax schedules may improve incentives: it could also increase inequality.
•Reforming labour/SSC taxes is more important for productivity in labour-intensive economies.
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GrowthGrowth Does the tax structure matter for growth?
Tax “negative effect” of tax on growth declines as you move from :
Corporate income tax Personal income tax Consumption taxes Property tax
Questions :•To what extent do different tax provisions affect investment and productivity?
•Does the industry/firm structure matter for the impact of taxes?
•Is there a trade off among efficiency, equity, and simplicity?
Source: Arnold, J., A. Johansson, C. Heady, B. Brys and L. Vartia. “Tax and Economic Growth”. OECD Centre for Tax Policy Administration /Economics Department Working Paper, 2008
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IntroductionIntroduction11
Fiscal Space and GrowthFiscal Space and Growth22
Fiscal Legitimacy and Development Fiscal Legitimacy and Development 33
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LegitimacyLegitimacy Latin America’s fiscal stance has improved
Source: Latin American Economic Outlook 2009 (forthcoming). Information based on investments banks' publications, 2008
Note: countries analysed are Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela during the period July 1997- February 2008, covering 15 presidential elections before 2006 and 8 presidential elections since 2006 (non overlapping elections).
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Investment banks' recommendations during presidential elections
(Window:-9 months before and +9 months after the election)before 2006 since 2006
Source: OECD Development Centre, Based on Nieto and Santiso (2008).
Note: Difference calculated for each period between primary spending in election-year and average on primary spending of the last three non-election years prior to election.
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Source: Latin American Economic Revenue Statistics, 2008. OECD Development Centre, Paris. Based on ECLAC’s ILPES Database and OECD Revenue Statistics Database.
Tax revenue for selected countries (Central Government, % GDP, 2006)
LegitimacyLegitimacy However, fiscal recipes remain low
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Source: Latin American Economic Outlook 2008. OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006).
47 49 50 5156 57
47 48 4946
48 48 4954 52
3537 38
0
10
20
30
40
50
60C
hil
e
Per
u
Arg
enti
na
Mex
ico
Bra
zil
Co
lom
bia
Sp
ain
Ital
y
Po
rtu
gal
Gin
i coe
ffic
ient
Inequality before and after taxes and transfers
LegitimacyLegitimacy Fiscal Progressivity is not a matter of DNA
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05
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Ecu
ador
Per
uG
uate
mal
aM
exic
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oliv
iaC
osta
Ric
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agua
Arg
entin
aH
ondu
ras
El S
alva
dor
Ven
ezue
laU
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ayC
hile
% of citizens who trusttax revenue is well spent
(2003-05)
Source: “Latin American Economic Outlook 2008”. OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, 2003-2006.
Firms’ assessment of the neutrality/composition of government
decisions/spending (2003-2006)
Fairer/Wiser
Unfair/ Wasteful
1
2
3
4
Latin America
OECD
Neutrality Composition
LegitimacyLegitimacy Fiscal Legitimacy is low
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LegitimacyLegitimacy More than quantity, is the quality of spending
Education Expenditures and Performance
Mexico
NorwayPolandSlovak Republic
Spain United States
Brazil
Indonesia
Thailand
Tunisia
Uruguay
300
350
400
450
500
550
600
- 5,000 10,000 15,000 20,000 25,000 30,000
Annual expenditure on educational institutions per student (2001) in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents
Mat
hem
atic
s S
core
(P
ISA
2003
)
Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)
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Source: Latin American Economic Outlook, 2008. OECD Development Centre, 2007. Based on ECLAC’s Panorama Social, 2007.
LegitimacyLegitimacy Equity matters: Spending is often regressive
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ConclusionsConclusions Growth, Fiscal Policy and Development
1. Fiscal Space is not one-dimensional.
2. Improving the social contract between citizens (and firms) and the state – fiscal legitimacy – will also broaden fiscal space.
3. Best practices can be identified to promote growth, equity and the quality of public services.
4. Fiscal policy must improve the quality (and the quantity) of revenues and expenditures.
5. Tax administration matters: weak administration limits the ability to:
- raise revenue- achieve a balanced tax structure- engage citizens in a tax-paying democracy
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Thank you!
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