Remarks by Vitor Gaspar, Director of the IMF’s Fiscal Affairs
Department, at the plenary session “Digitalization of Public Finance:
International Experience and Domestic Features” during the Moscow
Financial Forum “Financial Systems of the 21st Century
Competitive Economy: Challenges and Solutions”, Moscow, September 8,
2017
[1]
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The world is undergoing profound transformations powered by information and
communications technology and increasingly by robots and artificial
intelligence. These are often regarded as challenges for government
policies and public administration.
The public is increasingly calling on governments to offset or mitigate the
negative social and economic impacts of technological change, and at the
same time the ability of governments to mobilize resources is being eroded
by wider opportunities for tax avoidance and tax evasion. These concerns
are real and policymakers need to take steps to address them.
At the same time, the digital revolution offers exciting new opportunities
for public finance. In our forthcoming book, Digital Revolutions in Public Finance, the IMF is looking at
possibilities for public finance in the XXI century.
[2]
Winning strategies will involve smart policies that facilitate
transformation and change. It is important to realize that technology is
not a panacea or an end in itself. It will serve whatever purpose societies
choose. Moreover, technological revolutions take time and political will
and vision are necessary to guide this lengthy process. And – as I will
emphasize later – details matter.
Today, I will highlight the important roles of visionaries, architects
and plumbers in realizing the opportunities for public finances offered by
the digital revolution.
Visionaries: Pushing us to the frontier
Our book shows exciting possibilities to shape the frontiers of public
finance in the digital age. These possibilities reflect how the government
collects, processes, acts on and disseminates information. At a more
fundamental level, public administration will be able to interact with the
economy and civil society in new ways. The implications are far-reaching.
Technology will allow governments to be more effective and efficient at
what they are doing but, also, more fundamentally to design systems and
policies in completely new ways.
The book illustrates and documents possibilities from the viewpoint of
development economics. The pace of transformation is so fast and its
implications so comprehensive that there are ample opportunities for
developing economies to “leapfrog” to newer and more sophisticated policy
formulation, design, and implementation. Smart policies will accelerate and
shape the use of technology in society and thereby contribute to facilitate
change and foster inclusive growth.
The book is full of examples of such smart policies, of countries that have
been able to go beyond implementing international best practice. Often,
they have been able to define best practice itself. Estonia stands out in
providing government services online. Using an electronic identity card,
citizens can vote online, consult medical records, and file taxes—just a
few of the 600 e-services that the government offers.
Plumbers: Better pipes, fewer leaks
About a year ago, Esther Duflo, the MIT economist, argued, in her Richard
Goode Lecture at the IMF, that caring about the plumbing – laying the pipes
and fixing the leaks – is crucial and necessary. I have used her lecture as
inspiration for the structure of my talk today.
A successful innovation program requires an interactive engagement of
policymakers, experts and stakeholders. With new information and new
capabilities offered through the digital revolution come a wide range of
new possibilities for enhanced implementation of existing tax and spending
policies. These include lower costs of tax collection and compliance, as
well as of delivering public services, administering social programs, and
managing public finances.
We have examples of successful interactions between policymakers and
stakeholders. In Kenya, the money-transfer system M-Pesa originated a
revolution in tax policy and administration. It included a web-enabled
application for tax administration (the iTax System) and the possibility
for taxpayers to pay taxes and access their tax information through their
mobile phones (the M-service platform). The book describes these
innovations, detailing the critical role of the monetary authorities and
the telecommunications regulator in providing an appropriate legal and
regulatory framework, and the importance of the modernization efforts of
the Kenya Revenue Authority prior to the implementation of the iTax and
M-service systems.
Another wonderful example of fruitful interaction between policymakers and
stakeholders is documented in
a paper by Muralidharan, Niehaus and Suktankar, 2016a
(as quoted in Duflo, 2016). The paper analyses the MNGREGS program in
India. The program is a demand-based workfare program. It provides up to
100 days of work for rural households.
However, the program was affected by widespread corruption. A careful
randomized experiment was carried out to evaluate the effect of
biometrically validated payments, through the use of smart cards.
[3]
They found that leakages in payments were reduced and that delays in
payments were shortened. Perhaps more important, the design of the
experiment allowed for follow-up work on the effect of the policy on
private sector wages.
Muralidharan, Niehaus and Suktankar reached a startling conclusion: by
strengthening the effectiveness of the program in putting a lower limit on
wages, it so reinforced the market position of the low paid that private
sector employers were led to increase the wages they offered – and
substantially: 90 percent of the gains accrued to individuals came from
this general equilibrium effect.
The book includes a chapter by Susan Lund, Olivia White and Jason Lamb, who
estimate that digitizing payments in developing countries can lead to
savings between 0.8 and 1.1 percent of GDP, on an annual basis.
[4]
Of this total about 0.5 percent of GDP corresponds to fiscal savings. The
remainder corresponds to estimated gains for enterprises and individuals.
The estimates are based on available data for seven countries: Brazil,
China, India, Indonesia, Mexico, Nigeria and South Africa.
These seven economies correspond to more than 60 percent of GDP of all
developing economies.
[5]
The range of gains estimated, for this group of seven countries, is
substantial. At the extreme we have Nigeria, with potential gains in the
range from 1.0 to 1.7 percent of GDP, and South Africa, with 0.2 to 0.4
percent. The pecking order is clear: the more backward a country is in the
adoption of digital payments, the higher estimated potential gains. In
Nigeria and Indonesia, only 20 to 25 of the volume of transactions
associated with government expenditures was digitalized. The proportion was
even lower on the revenue side, with only 10 to 15 percent using digital
channels.
It is remarkable that these estimates take only into account direct monetary savings. There are other possible benefits
associated with increased use of digital payments by individuals and
businesses: improving government service delivery; reductions in tax
evasion and avoidance and a levelling of the playing field. Nevertheless,
as the above experience with workfare in India shows, these indirect,
general equilibrium effects, may well be substantially bigger.
This is not to say that digitalization can offer a perfect technological
solution to fundamental policy and institutional problems. In Digital Revolutions, Ravi Kanbur, cautions against over optimism
in viewing technology as a solution for difficulties in targeting public
expenditure for poverty reduction. In addition, digitalization does not
necessarily eliminate constraints brought about by political economy
considerations, norms, and existing institutions.
Architects: Design shapes results
Greater access to information and enhanced digital systems and processing
capabilities could also open up new options for policymakers. Our book
offers some ideas on how the digital revolution might offer scope to
rethink the design of tax systems.
Tax systems, which encompass tax policy and revenue administration, are
based on the information the tax authority can access. Digital information
affords better enforcement of existing rules; while access to richer
information sets allows for improvements in the rules themselves. As Bas
Jacobs explains in the book, as the available information set expands,
policy design options also expand. For example, tax liabilities could be
conditioned on not only the taxpayer’s current yearly income, but perhaps
even lifetime income and wealth. By conditioning tax schedules on more
information, the government can target income redistribution better and
potentially in more efficient ways.
Digital systems present new roles for consumers and third parties in
facilitating enhanced compliance.
The emerging peer-to-peer (P2P) economy, in which a digital platform
intermediates transactions between individual buyers and sellers, has
introduced organization and formalization to previously informal and
perhaps undocumented activities.
Digitalization presents new opportunities, and in the book Aqib Aslam and
Alpa Shah argue that digital platforms can act as crucial interlocutors for
tax administrations by providing third party information or even acting as
agents—by, for example, withholding taxes.
At the same time, if revenue administrations and policymakers approach
digital revolutions in a passive way, they may well witness increased
erosion of tax bases as individuals and businesses use new possibilities to
engage in tax evasion or tax avoidance.
That may be particularly relevant for international taxation, an issue gets
close attention in the book. Over recent years, digitalization has
intensified challenges in international taxation by enabling an increasing
number of companies, including many household names, to operate and sell
electronically in multiple jurisdictions without having much of a physical
presence there.
As discussed in the book’s chapter by Michael Devereux and John Vella, one
approach to this problem is to widen the current notion of what it means to
be active in a country for tax purposes. A more radical alternative is to
change the nature of the corporate tax more profoundly, to impose the tax
liability where consumers or shareholders are located, rather than where
the business has a production-related presence. In both cases, digital
technology is instrumental in implementation.
Conclusion
Digital revolutions in public finance open ample opportunities for
countries all around the world. Such revolutions offer the promise of more
inclusive societies, benefiting from lower transactions’ costs; more
effective provision of public services; and a more transparent and
accountable public administration. The possibilities cannot be fully
grasped at present. However, technology is not a panacea. It is not an end
in itself. It will serve whatever purposes societies choose. Visionaries,
architects and plumbers will have to work hand-in-hand with a combination
of vision, strategic thinking, political will, attention to detail and
capacity to adapt. Although the outcomes of revolutions are inherently hard
to predict, our book make clear that the effects of the current and future
digital revolutions are likely to be profound.
References
Duflo, Esther, 2016, 2nd Annual Richard Goode Lecture, The
Economist as Plumber: Laying the Pipes, Fixing the Leaks, Washington DC,
HQ2 Conference Hall 1, available at
http://www.imf.org/en/News/Events/2nd-Richard-Goode-Lecture
Gupta, Sanjeev, Michael Keen, Alpa Shah and Geneviève Verdier, Forthcoming
in 2017, Digital Revolutions in Public Finance, International
Monetary Fund (with the support from the Bill and Melinda Gates
Foundation).
McKinsey Global Institute, 2016,
Digital Finance for All: Powering Inclusive Growth in Emerging
Economies,
McKinsey Global Institute, Washington, D.C. available at:
http://www.mckinsey.com-/media/McKinsey/Global%20Themes/Employment%20and%20Growth/How%20digital%20finance%20could%20boost%20growth%20in%20emerging%20economies/MG-Digital-Finance-For-All-Full-report-September-2016.ashx
Muraliharan, Karthik, Paul Niehaus and Sandip Sukhtankar, 2016a, Building
State Capacity: Evidence from Biometric Smartcards in India, American Economic Review, 106 (10): 2895 – 2929.
Muralidharan, Karthik, Paul Niehaus, and Sandip Sukhtankar, 2016b, General
Equilibrium Effects of (Improving) Public Employment Programs: Experimental
Evidence from India. Working Paper.
Naritomi, Joana, 2015, Consumers as Tax Auditors, Working paper, London
School of Economics, London.
[1]
I would like to thank Jacqueline Deslauriers, Sanjeev Gupta,
Michael Keen, Tigran Poghosyan, Alpa Shah, and Geneviève Verdier
for their help with preparation of these remarks.
[2]
The free electronic version of the book will be available in PDF
format on the IMF’s website in mid-November, courtesy of the Bill
& Melinda Gates Foundation. My colleague Sanjeev Gupta has just
presented the summary of the book at a G20 event co-organized with
the Brookings Institution and hosted by the Argentinian presidency
in Buenos Aires.
[3]
In India, the government has combined the use of unique biometric
identifiers (the Aadhaar program) and financial inclusion for both
efficiency and effectiveness in social benefits and to reduce the
number of illegitimate beneficiaries under welfare programs. In
early 2017, the program had already reached 1.15 billion people.
The potential for society and policy is just beginning to be
explored. A recent decision of the Indian Supreme Court to
recognize a fundamental right to privacy is a reminder, however,
that sharing information with government in ways that may, for
instance, enable it to collect tax revenue more effectively, can be
contentious.
[4]
Their work draws on earlier analysis by McKinsey Global Institute
(2016).
[5]
The authors use their methodology to compute potential gains for
individual countries. Then they extrapolate for the group of
developing economies, assuming that potential gains are
proportional to GDP weights.