Generating Public Revenue to Build Resilient Economies

IMF News, February 13, 2017

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Speech by Christine Lagarde, IMF Managing Director, Dubai, UAE, February 12, 2017.
Core message: countries should build resilience through robust public finances by generating higher, more reliable government revenue via state-of-the-art tax systems and coordinated tax policy and administration reform.
Contextual risks noted: conflicts, lower oil prices, and geopolitical uncertainty; oil prices have increased recently but are not expected to return to pre-2014 levels.

IMF expectation: global economic activity to pick up “this year and next” across both advanced and emerging economies.
Fiscal transparency finding: IMF staff research shows greater data transparency leads to a 15 percent reduction in the spreads on emerging market sovereign bonds—three months after the improvements are made.
Revenue mobilization impacts and country examples:
- Introducing a VAT at a 5 percent rate could raise anywhere from 1 to 2 percent of GDP in the Gulf countries.
- Algeria: the 2017 budget law, for the first time, includes a medium-term framework setting revenue and spending targets for the next three years.
- Mexico: boosted 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.
- Egypt: replacing the old general sales tax with a new VAT is expected to raise 1.5 percent of GDP more in revenue than the old tax once fully implemented.
- Mauritania: total government revenue increased from about 20 per cent of GDP in 2009 to 28 percent in 2014 after coordinated tax and administration reforms.
- Jordan and Lebanon: well-designed and well-administered VATs have enabled lowering customs tariffs and reducing income tax on labor and capital.

Establish a five-to-ten-year revenue target as a first step to align revenues with spending in the short and medium term.
Create a comprehensive reform plan focused on long-term institution building, not short-term fixes.
Collect and disseminate good data to support decision-making.
Priorities by country type:
- Oil-exporting countries: diversify revenue sources away from oil and gas; introduce VAT and other consumption taxes (e.g., on tobacco and sugar-sweetened beverages); consider income and property taxation over time.
- Oil-importing countries: broaden the base of existing taxes; rationalize multiple VAT rates and other tax preferences; simplify rate structures and remove exemptions, tax holidays, and carve-outs.
Consider making tax systems more progressive, including lifting the top marginal tax rate on personal income where appropriate.
Apply current tax rules consistently and coherently.

Principle: interlink tax policy reform with revenue administration reform from the outset to avoid time-consuming problems and to “leapfrog” development stages.
Two main administrative priorities:
- Simplify codes and regulations, including procedural laws that establish the powers of tax agencies and the rights of taxpayers.
- Upgrade people’s skills and technical resources to improve tax compliance and taxpayer services.
Use technological innovation to modernize IT infrastructure for easier filing and payment (including mobile technology) and to improve verification using third-party data.
Examples:
- Saudi Arabia: modernizing IT infrastructure to improve filing, payment, and compliance verification.
- GCC customs union: technology has helped collect and administer the common external tariff.

IMF provides technical assistance, diagnostics, and training to build institutional capacity in tax policy and administration.
Examples of IMF engagement over the past 12 months:
- Algeria: advice on improving tax compliance and quality of taxpayer services.
- Egypt: assistance to gear up revenue administration for VAT introduction.
- Iraq: diagnostic assessment of tax and customs administrations.
- Jordan: help to improve the accuracy of taxpayer data to improve compliance and reduce tax arrears.
- Lebanon: advice on reducing VAT refund fraud and strengthening risk management procedures.
Regional IMF assets cited: Middle East Technical Assistance Center in Beirut; Center for Economics and Finance in Kuwait offering regular courses.

Forge a comprehensive strategy that interlinks tax policy reform and administration reform to generate higher and more reliable revenue.
Set medium-term revenue targets and pursue long-run institution building.
Broaden tax bases, simplify tax systems, and remove distortive exemptions to improve efficiency and equity.
Invest early in administrative capacity and IT modernization to improve compliance and service delivery.
Promote fiscal transparency and data sharing to increase government accountability, reduce borrowing costs, and strengthen resilience.

Building tax capacity is essential to sow the seeds of a sustainable and inclusive economy.
Generating higher and more reliable government revenue will make public finances more resilient and help build economies that work for all citizens.

Source: Christine Lagarde, "Generating Public Revenue to Build Resilient Economies", Dubai, UAE, February 12, 2017.