"Tax Policy and Tax Administration Challenges for Restoring Fiscal Sustainability"IMF-Japan High level Tax Seminar for Asian and Pacific Countries
Opening Remarks by Naoyuki Shinohara
Deputy Managing Director
International Monetary Fund
January 11, 2011, Tokyo, Japan
As prepared for delivery
It is my great pleasure to welcome you to the IMF-Japan High Level Tax Seminar for Asian and Pacific Countries organized by our Fiscal Affairs Department. I would like to thank our co-host, the Japanese Ministry of Finance, for its generous support to the seminar, and staff of the Fiscal Affairs Department and Regional Office for Asia and the Pacific for their
efforts in making this seminar possible. I also thank the delegates from Australia, Korea, and Singapore for volunteering to participate in the seminar to share their experiences with other participants.
This seminar takes place at a time when fiscal issues are front-and centre-stage worldwide. Many advanced, emerging and developing economies all face significant challenges in years ahead, though their challenges differ. So in thinking about taxation, we need to understand where we – the world in general, and Asia in particular – now are, and what the outlook is. Let me first say a few words on the state of the world economy.
While the global recovery continues to advance, it remains uneven across the world. In the advanced economies, the recovery is somewhat fragile. High unemployment, weak household balance sheets and sluggish credit growth are holding back private demand. The outlook is very different in many emerging and developing economies, where strong internal demand and a rebound in global trade have powered a robust recovery—especially in Asia.
What are the policy priorities today? There is of course a need to continue to provide sufficient support for aggregate demand through appropriate economic policies. The extent of this, however, varies across countries. Here, however, I will focus more on the medium-term challenge of ensuring fiscal solvency.
In the wake of the global financial crisis, overall fiscal balances have deteriorated sharply, particularly in advanced economies, as the result of various factors. Some of those factors are transitory, such as the cyclical revenue losses and the implementation of discretionary fiscal stimulus to arrest the fall in global demand. Others may well have a longer lasting impact, such as the reductions in output levels and financial sector activities and profits. Even greater, pre-existing challenges stem from the projected increases in age-related entitlements associated with slow but inexorable demographic changes.
Higher fiscal deficits have led to concomitant increases in government debts, particularly in advanced economies. Based on the projection published in the Fall issue of the IMF Fiscal Monitor, which will be revised in the Fiscal Monitor update later this month, gross general government debt in the advanced economies would reach a staggering 110 percent of GDP on average by 2015, up about 35 percentage points since the crisis. In this context, credible medium-term plans for fiscal consolidation are needed urgently to reassure markets. The goal of these plans should be to lower the debt-to-GDP ratio, not just to stabilize it. Indeed, one of the principal lessons of the crisis is the value of fiscal space for being able to cushion the economic impact of a crisis.
The emerging and developing economies in Asia were not severely hit by the crisis as the advanced economies. However, demographic changes and – in some low-income countries – development needs and social problems are also putting pressure on public finances. Thus, it is evident that maintaining fiscal sustainability is a key policy objective going forward for the emerging and developing economies, too.
Let me mention revenue trends a bit further. Tax revenues have been severely hit by the crisis in many countries since its onset. As noted, some effects are temporary but others are expected to be more persistent. This raises key tax policy and tax administration issues. On the tax administration front, it is a fact that, during crisis periods, tax compliance comes under pressure, and there is a need to avoid permanent damage to a country’s collection ability. On the tax policy side, the main challenge will be to reform the tax system in a way that, at least for countries with low tax rates and revenue ratios, will allow revenues to play an appropriate role in contributing to the strengthening in fiscal positions, while to the maximum extent, reducing tax distortions. In this respect, there are large margins for reducing tax expenditures in advanced, emerging, and developing economies.
Accelerating globalization is also imposing challenges for governments in containing revenue leakage. While tax policy and tax administration systems are typically more sophisticated in Asia than in other regions, the risk to revenue posed by aggressive tax planning and tax avoidance by multinational enterprises and their own residents is growing faster than in other regions.
In this seminar, we will focus on the revenue side of medium-term plans for fiscal consolidation. By sharing with participants the Fiscal Affairs Department’s expertise in tax policy and tax administration, we intend to discuss viable approaches to address tax policy and tax administration challenges for ensuring fiscal sustainability. Let me briefly explain the main topics we are going to discuss in the coming 4 days.
Tax policy options for fiscal sustainability: We will review overarching principles in designing a tax reform plan for each major tax. Of course, as the tax to GDP ratio and the composition of revenue sources differ by country, there will be a need in practice for country-specificity in designing a tax reform package.
Tax administration options for fiscal sustainability: Significant tax administrative gaps are widespread in both advanced and developing economies. Pervasive abuse through informality, aggressive tax planning, and offshore tax abuse erodes revenue. We will discuss with participants how to ensure tax discipline and how to reduce tax admistrative gaps based on best practices.
Taxation of the financial sector: In response to the request of the G20 group of countries, we submitted a report last June on “how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system.” In this seminar, we hope for a fruitful discussion on this topic.
As in other policy areas, international cooperation is important in meeting tax policy and tax administration challenges. I hope that participants from the 19 countries will use the opportunity provided by this seminar to build and strengthen personal relationship.
I wish you all productive discussions.