Fiscal Space, Fiscal Legitimacy and Development

Fiscal SpaceFiscal Space, Fiscal Legitimacy g yand Development

G20 Workshop on Fiscal Space for Growth and Social Policy

19 20 J 2008

Javier Santiso

19-20 June 2008Buenos Aires

Javier Santiso

Director & Chief Development Economist, OECD Development Centre

1

Introduction11

Fiscal Space and GrowthFiscal Space and Growth22 Fiscal Space and GrowthFiscal Space and Growth22

Fiscal Legitimacy and Development Fiscal Legitimacy and Development 33

2

The The DevelopmentDevelopment CentreCentre Bridging OECD and Emerging Economies

Non-OECD members2008 - 10 members

OECD members 2008 - 23 members

Chile

South

Israel

BrazilSouth Africa

India

Brazil

Romania

ThailandVietnam

EgyptColombia

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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

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•50 presentations at international conferences

•235 press articles published in 18 countries

•17.500 members of LEO’s newsletter

PartnershipPartnership OECD Centre for Tax Policy & Administration

Mission:

•Providing Technical Expertise to the Committee on Fiscal Affairs by examining all 

Enlargement Initiative

Latin American Revenue Statistics Project:

•An initiative to extend the OECD Revenueaspects of taxation.

•Covers international and domestic tax issues, direct/indirect taxes, tax policy and 

An initiative to extend the OECD Revenue Statistics methodology to a number of Latin American countries. 

tax administration.

•Provide annual comparisons on tax levels and tax structures in member countries.

•Recent work on environmental policy and taxation, taxation and growth.

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IntroductionIntroduction11

Fiscal Space and GrowthFiscal Space and Growth22 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

The four pillars of Fiscal Space

“The capacity of a government to providefinancial resources for a desired purpose,subject to the constraint that the fiscal positionis sustainable, both over the medium and long‐term ”term.

Heller, P. Introduction to “Fiscal Policy: Fiscal Elements of Growthand Development”. Proceedings of G‐20 Workshop. Istanbul,Turkey, July 2007.

“The gap between the current level ofexpenditure and the maximum level ofexpenditures a government can undertakewithout impairing its solvency”

Source: Fiscal Policy: Fiscal Elements of Growth and Development”.  d f k h b l k lwithout impairing its solvency

Development Committee of the World bank‐IMF Board on FiscalPolicy and Growth, 2006.

Proceedings of G‐20 Workshop. Istanbul, Turkey, July 2007.

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GrowthGrowth Tax structure and channels of growth

Taxation

Income taxes and

Social SecurityConsumption Taxes Taxes on Property

and Wealth

Companies Households

ProfitsSpecial

taxSSC

employerSSC

employeeLabour

income tax

General taxes

(e.g. VAT)Taxes on specific

goods and services

Property

State taxWealth

Tax

Capital

Income tax

Source: Heady C “Tax Policy for Growth ” In Fiscal Policy: Fiscal Elements of Growth and Development” Proceedings of G 20

Affected drivers of growth:

Employment, Human Capital Formation

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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.

GrowthGrowth Tax structure is a creator of fiscal space

Tax structure in LAC  and OECD(2006)% of GDP

12   

14   

16   

4

6   

8   

10   

‐

2   

4   

Taxes on goods and services

Taxes on income, profits and capital

Social security contributions

Taxes on property Taxes on payroll and workforce

Other taxes

S L ti A i R St ti ti (LARS) 2008 OECD D l t C t P i B d d t f ECLAC d OECD

services profits and capital gains

contributions and workforce

LAC OECD

9

Source: Latin American Revenue Statistics (LARS), 2008. OECD Development Centre, Paris. Based on data from ECLAC and OECD.

GrowthGrowth Tax Policy and Growth: Implications

Corporate taxes and Investment  Income taxes

10

12

Individual Income taxes in OECD and LAC2005, % of GDP

10

12

Corporate income taxes in OECD and LAC2005, % of GDP

2

4

6

8

-

2

4

6

8

Source: Latin American Revenue Statistics, 2008. OECD Development Centre, Paris.

•Reforming top marginal tax schedules may

-

LAC OECDLAC OECD

•Cutting corporate taxes may promote productivity growth and investment.

•Reforming top marginal tax schedules may improve incentives: it could also increase inequality.

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•Reforming labour/SSC taxes is more important for productivity in labour‐intensive economies.

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 :h ff ff•To what extent do different tax 

provisions affect investment and productivity?

•Is there a trade off among efficiency, equity, and simplicity?

•Does the industry/firm structure matter for the impact of taxes?

Source: Arnold, J., A. Johansson, C. Heady, B. Brys and L. Vartia. 

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, , , y, y“Tax and Economic Growth”. OECD Centre for Tax Policy Administration /Economics Department Working Paper, 2008

IntroductionIntroduction11

Fiscal Space and GrowthFiscal Space and Growth22 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

Investment banks' recommendations during presidential elections

(Window: 9monthsbefore and+9months after the election)

Difference in Primary Spending between electoral and non‐electoral years

1990 1996

0.2

0.3

0.4

(Window:‐9 months before and +9 months after the election)before 2006 since 2006

3

4

5

1990-1996

2000-2006

-0.2

-0.1

0

0.1

-1

0

1

2

Argentina Brazil Chile Colombia Mexico Peru Uruguay Venezuela

-0.4

-0.3

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9-3

-2

-1

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).

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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LegitimacyLegitimacy However, fiscal recipes remain low

Tax revenue for selected countries (Central Government, % GDP, 2006)

Source: Latin American Economic Revenue Statistics, 2008. OECD Development Centre, Paris. Based on ECLAC’s ILPES Database and OECD Revenue Statistics Database.

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OECD Revenue Statistics Database.

LegitimacyLegitimacy Fiscal Progressivity is not a matter of DNA

Inequality before and after taxes and transfers

47 49 50 5156 57

47 48 4946 48 48 49

54 52

3537 3840

50

60

t 35

20

30

40

ini c

oeffi

cien

t

0

10

hile

Peru

tina

xico

razi

l

mbi

a

ain

taly

ugal

G

Source: Latin American Economic Outlook 2008. OECD Development Centre, 2007. Based on data by Goñi, López and Servén (2006)

Ch P

Arg

ent

Mex Br

Col

om Spa It

Port

u

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López, and Servén (2006).

LegitimacyLegitimacy Fiscal Legitimacy is low

% of citizens who trusttax revenue is well spent

(2003 05)

Firms’ assessment of theneutrality/composition of government

decisions/spending (2003 2006)

20253035

(2003-05) decisions/spending (2003-2006)

Fairer/4

05

101520

r u a o a a a l y a a a s r a y e

a e /Wiser

Unfair/ W t f l

123

Ecu

ado

rP

eru

Gu

atem

ala

Mex

ico

Bo

livia

Co

sta

Ric

aP

anam

aB

razi

Par

agu

a yC

olo

mb

iaN

icar

agu

aA

rgen

tina

Ho

nd

ura

sE

l Sal

vad

or

Ven

ezu

ela

Uru

gu

ayC

hile Wasteful

Latin America

OECD

Neutrality Composition

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.

y p

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LegitimacyLegitimacy More than quantity, is the quality of spending

Education Expenditures and Performance600

NPolandSlovak Republic500

550

Scor

e ) NorwayPoland

Spain United States

ThailandUruguay

400

450

hem

atic

s S

(PIS

A 2

003

Mexico

Brazil

IndonesiaTunisia

300

350

Mat

300- 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

Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)

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LegitimacyLegitimacy Equity matters: Spending is often regressive

Source: Latin American Economic Outlook, 2008. OECD Development Centre, 2007. Based on ECLAC’s Panorama Social, 2007.

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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 p g ( )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 d drevenues and expenditures.

5. Tax administration matters: weak administration limits the ability to:ability to:

‐ raise revenue‐ achieve a balanced tax structure‐ engage citizens in a tax‐paying democracy

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engage citizens in a tax paying democracy

Thank you!

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