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Fiscal SpaceFiscal Space, Fiscal Legitimacy g yand Development
G20 Workshop on Fiscal Space for Growth and Social Policy
19 20 J 2008
Javier Santiso
19-20 June 2008Buenos Aires
Javier Santiso
Director & Chief Development Economist, OECD Development Centre
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Introduction11
Fiscal Space and GrowthFiscal Space and Growth22 Fiscal Space and GrowthFiscal Space and Growth22
Fiscal Legitimacy and Development Fiscal Legitimacy and Development 33
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The The DevelopmentDevelopment CentreCentre Bridging OECD and Emerging Economies
Non-OECD members2008 - 10 members
OECD members 2008 - 23 members
Chile
South
Israel
BrazilSouth Africa
India
Brazil
Romania
ThailandVietnam
EgyptColombia
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LEOLEO Latin American Economic Outlook impact
Activities:
•11 seminars organized on topics related to Latin America
•50 presentations at international conferences
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•50 presentations at international conferences
•235 press articles published in 18 countries
•17.500 members of LEO’s newsletter
PartnershipPartnership OECD Centre for Tax Policy & Administration
Mission:
•Providing Technical Expertise to the Committee on Fiscal Affairs by examining all
Enlargement Initiative
Latin American Revenue Statistics Project:
•An initiative to extend the OECD Revenueaspects of taxation.
•Covers international and domestic tax issues, direct/indirect taxes, tax policy and
An initiative to extend the OECD Revenue Statistics methodology to a number of Latin American countries.
tax administration.
•Provide annual comparisons on tax levels and tax structures in member countries.
•Recent work on environmental policy and taxation, taxation and growth.
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IntroductionIntroduction11
Fiscal Space and GrowthFiscal Space and Growth22 Fiscal Space and GrowthFiscal Space and Growth22
Fiscal Legitimacy and Development Fiscal Legitimacy and Development 33
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GrowthGrowth Understanding Fiscal Space
Fiscal Space
“The capacity of a government to provide
The four pillars of Fiscal Space
“The capacity of a government to providefinancial resources for a desired purpose,subject to the constraint that the fiscal positionis sustainable, both over the medium and long‐term ”term.
Heller, P. Introduction to “Fiscal Policy: Fiscal Elements of Growthand Development”. Proceedings of G‐20 Workshop. Istanbul,Turkey, July 2007.
“The gap between the current level ofexpenditure and the maximum level ofexpenditures a government can undertakewithout impairing its solvency”
Source: Fiscal Policy: Fiscal Elements of Growth and Development”. d f k h b l k lwithout impairing its solvency
Development Committee of the World bank‐IMF Board on FiscalPolicy and Growth, 2006.
Proceedings of G‐20 Workshop. Istanbul, Turkey, July 2007.
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GrowthGrowth Tax structure and channels of growth
Taxation
Income taxes and
Social SecurityConsumption Taxes Taxes on Property
and Wealth
Companies Households
ProfitsSpecial
taxSSC
employerSSC
employeeLabour
income tax
General taxes
(e.g. VAT)Taxes on specific
goods and services
Property
State taxWealth
Tax
Capital
Income tax
Source: Heady C “Tax Policy for Growth ” In Fiscal Policy: Fiscal Elements of Growth and Development” Proceedings of G 20
Affected drivers of growth:
Employment, Human Capital Formation
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Source: Heady, C. Tax Policy for Growth. In Fiscal Policy: Fiscal Elements of Growth and Development . Proceedings of G‐20 Workshop. Istanbul, Turkey, July 2007.
GrowthGrowth Tax structure is a creator of fiscal space
Tax structure in LAC and OECD(2006)% of GDP
12
14
16
4
6
8
10
‐
2
4
Taxes on goods and services
Taxes on income, profits and capital
Social security contributions
Taxes on property Taxes on payroll and workforce
Other taxes
S L ti A i R St ti ti (LARS) 2008 OECD D l t C t P i B d d t f ECLAC d OECD
services profits and capital gains
contributions and workforce
LAC OECD
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Source: Latin American Revenue Statistics (LARS), 2008. OECD Development Centre, Paris. Based on data from ECLAC and OECD.
GrowthGrowth Tax Policy and Growth: Implications
Corporate taxes and Investment Income taxes
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12
Individual Income taxes in OECD and LAC2005, % of GDP
10
12
Corporate income taxes in OECD and LAC2005, % of GDP
2
4
6
8
-
2
4
6
8
Source: Latin American Revenue Statistics, 2008. OECD Development Centre, Paris.
•Reforming top marginal tax schedules may
-
LAC OECDLAC OECD
•Cutting corporate taxes may promote productivity growth and investment.
•Reforming top marginal tax schedules may improve incentives: it could also increase inequality.
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•Reforming labour/SSC taxes is more important for productivity in labour‐intensive economies.
GrowthGrowth Does the tax structure matter for growth?
Tax “negative effect” of tax on growth declines as you move from :
Corporate income tax Personal income tax Consumption taxes Property tax
Questions :h ff ff•To what extent do different tax
provisions affect investment and productivity?
•Is there a trade off among efficiency, equity, and simplicity?
•Does the industry/firm structure matter for the impact of taxes?
Source: Arnold, J., A. Johansson, C. Heady, B. Brys and L. Vartia.
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, , , y, y“Tax and Economic Growth”. OECD Centre for Tax Policy Administration /Economics Department Working Paper, 2008
IntroductionIntroduction11
Fiscal Space and GrowthFiscal Space and Growth22 Fiscal Space and GrowthFiscal Space and Growth22
Fiscal Legitimacy and Development Fiscal Legitimacy and Development 33
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LegitimacyLegitimacy Latin America’s fiscal stance has improved
Investment banks' recommendations during presidential elections
(Window: 9monthsbefore and+9months after the election)
Difference in Primary Spending between electoral and non‐electoral years
1990 1996
0.2
0.3
0.4
(Window:‐9 months before and +9 months after the election)before 2006 since 2006
3
4
5
1990-1996
2000-2006
-0.2
-0.1
0
0.1
-1
0
1
2
Argentina Brazil Chile Colombia Mexico Peru Uruguay Venezuela
-0.4
-0.3
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9-3
-2
-1
Source: Latin American Economic Outlook 2009 (forthcoming). Information based on investments banks' publications, 2008
Note: countries analysed are Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela during the period July 1997- February 2008, covering 15 presidential elections before 2006 and 8 presidential elections since 2006 (non overlapping elections).
Source: OECD Development Centre, Based on Nieto and Santiso (2008).
Note: Difference calculated for each period between primary spending in election-year and average on primary spending of the last three non-election years prior to election.
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LegitimacyLegitimacy However, fiscal recipes remain low
Tax revenue for selected countries (Central Government, % GDP, 2006)
Source: Latin American Economic Revenue Statistics, 2008. OECD Development Centre, Paris. Based on ECLAC’s ILPES Database and OECD Revenue Statistics Database.
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OECD Revenue Statistics Database.
LegitimacyLegitimacy Fiscal Progressivity is not a matter of DNA
Inequality before and after taxes and transfers
47 49 50 5156 57
47 48 4946 48 48 49
54 52
3537 3840
50
60
t 35
20
30
40
ini c
oeffi
cien
t
0
10
hile
Peru
tina
xico
razi
l
mbi
a
ain
taly
ugal
G
Source: Latin American Economic Outlook 2008. OECD Development Centre, 2007. Based on data by Goñi, López and Servén (2006)
Ch P
Arg
ent
Mex Br
Col
om Spa It
Port
u
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López, and Servén (2006).
LegitimacyLegitimacy Fiscal Legitimacy is low
% of citizens who trusttax revenue is well spent
(2003 05)
Firms’ assessment of theneutrality/composition of government
decisions/spending (2003 2006)
20253035
(2003-05) decisions/spending (2003-2006)
Fairer/4
05
101520
r u a o a a a l y a a a s r a y e
a e /Wiser
Unfair/ W t f l
123
Ecu
ado
rP
eru
Gu
atem
ala
Mex
ico
Bo
livia
Co
sta
Ric
aP
anam
aB
razi
Par
agu
a yC
olo
mb
iaN
icar
agu
aA
rgen
tina
Ho
nd
ura
sE
l Sal
vad
or
Ven
ezu
ela
Uru
gu
ayC
hile Wasteful
Latin America
OECD
Neutrality Composition
Source: “Latin American Economic Outlook 2008”. OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, 2003-2006.
y p
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LegitimacyLegitimacy More than quantity, is the quality of spending
Education Expenditures and Performance600
NPolandSlovak Republic500
550
Scor
e ) NorwayPoland
Spain United States
ThailandUruguay
400
450
hem
atic
s S
(PIS
A 2
003
Mexico
Brazil
IndonesiaTunisia
300
350
Mat
300- 5,000 10,000 15,000 20,000 25,000 30,000
Annual expenditure on educational institutions per student (2001) in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents
Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)
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LegitimacyLegitimacy Equity matters: Spending is often regressive
Source: Latin American Economic Outlook, 2008. OECD Development Centre, 2007. Based on ECLAC’s Panorama Social, 2007.
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ConclusionsConclusions Growth, Fiscal Policy and Development
1. Fiscal Space is not one‐dimensional.
2. Improving the social contract between citizens (and firms) and p g ( )the state – fiscal legitimacy – will also broaden fiscal space.
3. Best practices can be identified to promote growth, equity and the quality of public services.
4. Fiscal policy must improve the quality (and the quantity) of d drevenues and expenditures.
5. Tax administration matters: weak administration limits the ability to:ability to:
‐ raise revenue‐ achieve a balanced tax structure‐ engage citizens in a tax‐paying democracy
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engage citizens in a tax paying democracy
Thank you!
To visit us: www.oecd.org/devg/
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