Four things to consider to improve public revenues in the Global South
New findings from the Government Revenue Dataset
Across the Global South, governments continue efforts to increase domestic revenues and capacity for public spending. As concerns over debt distress grow and following the IMF and World Bank’s fall meetings, we share important research advancements made with UNU-WIDER’s Government Revenue Dataset (GRD), which continues to have broad implications for enhancing public revenues, especially across the Global South.
In this blog, we discuss four lessons for improved domestic revenue mobilization in the Global South. The lessons are based on the findings of seven new studies that make use of the GRD.
Factors associated with lower levels of public revenue
Three of these WIDER Working Papers examine factors which may reduce public revenue levels, particularly in low- and middle-income countries, such as informality, vulnerability to climate change, and the structure of aid receipts. Higher levels of informality are associated with lower revenue collection, according to the study by Abel Gwaindepi. Likewise, Tsompo et al. find that a similar association holds for vulnerability to climate change.
Compaoré and Tagem demonstrate that in contexts where aid is more fragmented, tax receipts are lower. This is because aid fragmentation induces important transaction costs in countries with a low institutional capacity, which provides an avenue for corruption and rent-seeking practices that weaken tax administration and prevent sound tax policy enforcement.
On the positive side, these findings point donors and policymakers to interventions in areas often considered unrelated to public finances, as new or alternative ways to support efforts to increase domestic revenues. For example, Gwaindepi shows how formalization of the labour market can support future revenues and documents a positive correlation between the quality of government, adoption of digital tax-filing processes, and domestic revenues. Climate adaptation and mitigation strategies and actions to improve donor coordination and reduce the transaction costs of aid receipts can also have a positive impact.
Quality of governance makes a difference
Hall and O’Hare empirically investigate the link between the level of government revenue per capita and six indicators of the quality of governance over the period 1980–2020. The authors’ results suggest a strong effect over time whereby an increase in government revenue leads to a steady improvement in governance levels. This result suggests the existence of an important virtuous circle between government revenue and the reduction of corruption, which can have a much larger impact on the Sustainable Development Goals than previous work has suggested.
Fiscal space for crisis response
A study by Annalena Oppel captures government responses to the pandemic worldwide in the year 2020 and maps them against each country’s fiscal space—measured by domestic revenues in 2019. The paper explores the political and fiscal feasibility of the chosen response to the economic shock of the pandemic and explores the viability of repeating this response as a ‘blueprint’ for future crises.
The paper then classifies responses across the countries studied into four types and tests each type for future feasibility. Only two response types are judged feasible, meaning politically possible and within the bounds of common understandings of a sustainable and responsible fiscus . This finding presents a major concern for development, as the conditions for a feasible response to future crises can mostly only be found in high-income countries.
The findings are sobering and point to an urgent need to support public budgets and shore up adaptive social protection systems across the Global South.
Tax structure matters
Bilicka et al. examine the influence of corporate tax avoidance on a host country’s tax structure. The innovative findings demonstrate that as the share of corporate profits shifted out of a country rise, countries see a smaller share of their tax take coming from corporate income tax (CIT) and a higher share from other sources, such as personal income tax or indirect taxation.
This raises questions about the knock-on effects of CIT avoidance for issues such as poverty or inequality reduction: existing evidence points to the regressivity of indirect taxes like the value-added tax. The cross-country work is complemented by a study using municipal-level microdata from Germany, which shows that in municipalities with a higher share of ‘aggressive’ multinationals , a significant decline in CIT revenues was seen, compared to those with a lower share of such multinationals.
After documenting the effect of profit shifting on tax structures, an analysis by Ouedraogo et al. shows that higher taxation—as measured by the tax-to-GDP ratio—is associated with widening income inequality in sub-Saharan Africa from 1980–2018. The authors also uncover some evidence of an inverse U-shaped relationship between the level of indirect taxes and income inequality—meaning that as the share of revenue collected by indirect taxes increases, this exerts upward pressure on income inequality. However, beyond a certain point, this pressure may begin to alleviate.
The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.