13 Examining fiscal space issues in 7 countries - P Heller, IMF


13 Examining fiscal space issues in 7 countries - P Heller, IMF

Is There Room for AdditionalSpendingin Social Sectors?Examining Fiscal Space issues in7 countries of South and Southeast Asia:Bangladesh, Laos, India, Indonesia, Pakistan, Philippines, &BangladeshPresentation to High Level Forum onHealth MDGs in Asia and the PacificPeter S. HellerInternational Monetary Fund(Tokyo, June 22, 2005)

Defining Fiscal SpaceThe availability of budgetary room that allows agovernment to provide resources for a desired purposewithout any prejudice to the sustainability of agovernment’s financial positionFiscal sustainability a key constraint:Ensuring the capacity to finance, over the medium to long-term agovernment’s expenditure requirements and service its debtConsider: can government spending enhance growth rates?Does spending in the current year preempt or create a needfor future spending?Need to consider these issues in a medium-term budgetaryframework—thus NOT just a sector specific issue2

Sources of Fiscal SpacePotential to increase tax revenue—tax policychange or tax administration reformReprioritize expenditures?Establish social health insurance schemesIncrease borrowing, domestic or external?Seignorage creation?Increase receipt of grants?Taking account of associated fiscal requirements ofexternal resource inflowsMacroeconomic challenges of absorbingadditional resource transfers?3

For Asian countries, not just a shorttermissueAs many countries seek to elaboratesocial insurance schemes in the healthand pensions sphere, the lessons ofindustrial countries in the context of agingpopulations should be firmly kept in mind.4

Revenue mobilization as a source offiscal space: What is feasible?Average Central Government RevenueShares as share of GDPLow income countries 17.7 percentTax share 14.5 percentLow-middle income countries 21.4 percent(tax share 16.3 percent)Upper middle income countries 26.9 (taxshare: 21.9 percent)5

Revenue SharesSome countries exhibit low tax ratios, notablyBangladesh and Laos, and there is clearlyroom for higher fiscal space from revenuemobilizationOthers suggest revenue ratios that havehistorically been higher, viz., Pakistan,Indonesia, the Philippines, and VietnamFor India, including general government bringstax ratio to 19 percent. Some further room fortax increases possible.6

25.0Tax Revenue/GDP, 1990-2003Laos, Vietnam: much scope for further increases in revenue share20.0Vietnam15.0Laos10.05.00.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20037

14.0Tax Revenue/GDP, 1990-2003Pakistan and Bangladesh: some scope to increase tax shares13.0Pakistan12. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20038

18.0Tax Revenue/GDP 1990-2003India, Indonesia, Philippines: also scope for further increasesPhilippines16.014.0Indonesia12.010.0India: Central Government8.06.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20039

Revenue mobilization efforts could bestrengthenedParticularly true for Bangladesh and Laos andIndonesia for nonoil taxesIn all countries, expand tax baseReduce tax holidays and exemptionsStrengthen tax and customs administrationLaos: reduce dependency on timber royalties; need tointroduce VATPakistan: much progress realized in revenueadministration, but revenue share in GDP still relativelylowPhilippines: significant decrease in tax ratio: tax reformefforts critical to fiscal space creationIndia: challenge of revenue rationalization; tax basebroadening10

Is there room for fiscal space creationby repriotizing expendituresWhile true for most, some countries’ spendinglevels (notably Bangladesh and Laos) areinsufficient to meet critical social andinfrastructural needsMore relevant, are ways to improve theefficiency and effectiveness of currentspending to meet key social and economicpolicy objectives11

30.0Total Spending/GDP, 1990-2003(Pakistan, Bangladesh)25.0Pakistan20.015.0Bangladesh10.05.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200312

26.0Total Spending/GDP, 1990-2003(India, Indonesia, Philippines)24.0Indonesia22.020.0Philippines18.016.0India14.012.010.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200313

Room for spending reprioritizationRoom for cutting back on poorly targeted fuelsubsidies (India, Vietnam, Laos, and Pakistan;in India, also need cuts in subsidies for foodand fertilizerIn Vietnam, civil service reform has occurred,but concerns re excessive cutbacks innonwage recurrent expendituresStrengthening in public expendituremanagement particularly important inIndonesia, and Laos15

In some countries, increased expenditure criticallyneededIn Bangladesh, need wage increases; room forcuts in nonpriority spendingIn Laos, budget spending highly compressed—little room for significant fiscal space fromexpenditure reprioritization; capital expenditurehas borne brunt; strong case for higherspending on health and education, with moregradual policy on increasing wage ratesIn Bangladesh and Laos, increased spendingcritically dependent on higher concessionalloans and grants17

In Pakistan, Govt has used fiscal space to increasesocial and poverty related spending; cutbacks inenergy subsidies envisaged; but further ambitiousobjectives re raising public investment and socialspending levels to increase economy’s growth rateIn Philippines, need for infrastructure spendingIndia, reprioritization would imply increased spendingin social sectors and infrastructure; better targeting ofsubsidies; and restraint on government wage bill18

Fiscal consolidation to create fiscal space:by reducing debt, governments can reduceburden of interest paymentsPublic debt levels high, raising medium-term debtsustainability issue, in India, Indonesia, Bangladesh,Pakistan and PhilippinesPhilippines: Nonfinancial public sector deficit more than5% of GDPSubnational debt an issue in India and Indonesia:Need for greater fiscal discipline by subnational units(e.g. India’s States): harder borrowing limits; needimproved expenditure efficiency:Bangladesh and Laos: need highly concessional debtIndia, Indonesia, and Philippines: fiscal prudencenecessary to maintain credibility in external capitalmarkets19

50.0Domestic Debt/GDP, 1990-2003(Bangladesh, Pakistan)45.0Pakistan40. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200320

60.0Domestic Debt/GDP, 1990-2003(India, Indonesia, Philippines)50.0India40.0Philippines30. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200321

70.0External Debt/GDP, 1990-2003(Bangladesh, Pakistan)Pakistan60.0Bangladesh50. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200322

100External Debt/GDP, 1990-2003(Laos, Vietnam)90Laos8070605040Vietnam30201001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200323

70.0External Debt/GDP, 1990-2003(India, Indonesia, Philippines)Indonesia60. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200324

Not much scope for use of seignorageto create fiscal spaceBut rising inflationary pressures a source of concern, inPhilippines and PakistanIndonesia: well managed monetary policy: critical toensure stable market expectationsIn Bangladesh, inflation has gradually increased in lastseveral years: requires caution then on domestic debtfinanced spendingIn Vietnam, not much scope for loosening of monetarypolicy, given concerns about inflationary expectationsand poor lending quality of private sector creditIn Laos, hard won gains on inflation front: limited roomfor monetary policy as a source of fiscal space25

Inflation, 1990-200320.018.0Philippines16.014.012.0PakistanIndia10. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200326

130.0Inflation, 1990-2003Laos110.090.070.0Indonesia50.030.010.0-10.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200327

70.0M2/GDP, 1990-200365.0Philippines60.055.0Indonesia50.045.0IndiaPakistan40.035.030.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200328

70.0M2/GDP, 1990-2003(Laos, Vietnam) data for Laos10.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200329

In some countries, privatizationproceeds could be used to createfiscal spaceFor example, in Indonesia, privatizationproceeds afford some room to be usedfor infrastructural spending;Similarly some scope in Vietnam30

Is there room for increased revenuemobilization through social healthinsurance (SHI) schemes?Worth considering some initial steps todevelop SHI schemes, particularly forcountries that have growing formal sectorand where revenue collectionmechanisms are relatively strongBoth Philippines and Indonesia havealready begun such schemes31

Preconditions for successful transition to aSHI (drawn from World Bank study):Growth prospects strongSignificant role of formal sector workersRelatively urbanized populationSome margin to increase labor costsHave adequate administrative capacityGood quality health care infrastructureExistence of a social consensus in favorPolitical stability and political rightsAbility to extend the system32

What are the key messages?Revenue policy reform as well as strengthening ofrevenue administration critical to achieving greaterfiscal spaceSome fiscal consolidation can enhance medium termfiscal space creation—reducing interest billExpenditure reprioritization critical in some countries—cutting subsidies; cutting transfers to loss-makingSOEs; some countries need further civil service reform;many expenditure needs still unmetIn the low-income countries, more fiscal spacerequires reliance on donors for concessional loans andgrantsOver time, worth considering a SHI type approach33

Spare SlidesNote:The slides with were presented whilethe others were not due to timeconstraints.34

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