Sustained public management and governance reforms critical for Asia Pacific

22 Nov 16

‘Aggressive’ reforms in public sector management and governance are needed in Asia-Pacific to mitigate the negative consequences of falling tax-to-GDP ratios, an Asian Development Bank governance specialist has told Public Finance International.

 

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Colombo, Sri Lanka

Colombo, Sri Lanka. The country has the second-highest deficit in the region and needs to be carefully monitored, the ADB said.

 

Following ADB’s publication of some key indicators for the region including fiscal data, Gambhir Bhatt, the bank’s technical advisor for governance, told PFI it would be wrong to say that none of the figures were concerning.

The information in the ADB’s report showed that the majority of governments in the region were operating on fiscal deficits of up to 14% of GDP and saw a drop in tax revenues in the past two years.

While in the longer term, overall tax-to-GDP ratios in Asia-Pacific have been rising, the region has some of the lowest in the world, especially in its developing countries.

In India, Afghanistan and Myanmar, for example, tax-to-GDP ratios were in the single digits in 2015, at 7%, 7.2% and 8.8%, respectively, according to the ADB report. This compares with an average of 34.4% in the OECD in 2014.

Bhatt said it was impossible to say whether falling tax-to-GDP ratios in some of the region’s economies were symptomatic of a general trend.

If there is a decline, however, one key reason for this would be the lowering of corporate tax rates in some of the countries and the misuse of incentives and other issues related to tax avoidance by multinational companies, he added.

That is borne out by the fact that out of the 17 countries in the region that saw decreases in their tax revenues, the biggest were in Micronesia (from 19% to 12.4%) and the Solomon Islands (35% to 32.4%) – both of which are widely considered tax havens.

Other factors include the persistence of an informal economy, as in India, or poorly designed tax policies or capacity shortfalls in administration, Bhatt said.

In the medium-term, Bhatt was hopeful that tax yields would be placed on a stronger footing, with India adopting a more harmonised tax system, Sri Lanka introducing VAT and similar measures being pursued in Bhutan and elsewhere.

Most of the region’s governments have also been operating in deficit, with the largest budget gaps in Brunei Darussalam (14% of GDP) and Sri Lanka (7.4% of GDP). Almost all of its major economies, including China, Vietnam, Cambodia, Malaysia, India and Australia were in the red in 2015.

Micronesia, on the other hand, had a 10.5% surplus.

Bhatt said that while the fiscal balances of many South Asian nations deteriorated in the wake of the financial crisis, they are improving again in line with the longer-term trend. However, Sri Lanka, currently undergoing an International Monetary Fund programme, and the Maldives, require further monitoring.

And, Bhatt continued, “it would not be correct to say that any of the data is not worrying”.

“There is need to take great care to ensure that broad governance and public sector reforms are continued to be pursued aggressively. Reforms are crucial to ensuring that falling tax-to-GDP revenues to not lead to long-term adverse effects on, for example, service delivery by governments.”

He said the main improvement areas are: reform of poorly performing state-owned enterprises; better mobilisation of domestic revenues, through both tax and non-tax measures; and strengthening public management institutions, such as regulatory bodies and anti-corruption agencies. 

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