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1 Fiscal Space, Fiscal Legitimacy and Development Javier Santiso Director & Chief Development Economist, OECD Development Centre G20 Workshop on Fiscal.

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Presentation on theme: "1 Fiscal Space, Fiscal Legitimacy and Development Javier Santiso Director & Chief Development Economist, OECD Development Centre G20 Workshop on Fiscal."— Presentation transcript:

1 1 Fiscal Space, Fiscal Legitimacy and Development Javier Santiso Director & Chief Development Economist, OECD Development Centre G20 Workshop on Fiscal Space for Growth and Social Policy June 2008 Buenos Aires

2 2 Introduction 1 Fiscal Space and Growth 2 Fiscal Legitimacy and Development 3

3 3 The Development Centre Bridging OECD and Emerging Economies Non-OECD members members OECD members members Chile South Africa India Thailand Egypt Israel Brazil Romania Vietnam Colombia

4 4 LEO Latin American Economic Outlook impact Activities: 11 seminars organized on topics related to Latin America 50 presentations at international conferences 235 press articles published in 18 countries members of LEOs newsletter

5 5 Partnership OECD Centre for Tax Policy & Administration Mission: Providing Technical Expertise to the Committee on Fiscal Affairs by examining all aspects of taxation. Covers international and domestic tax issues, direct/indirect taxes, tax policy and tax administration. Provide annual comparisons on tax levels and tax structures in member countries. Recent work on environmental policy and taxation, taxation and growth. Enlargement Initiative Latin American Revenue Statistics Project: An initiative to extend the OECD Revenue Statistics methodology to a number of Latin American countries.

6 6 Introduction 1 Fiscal Space and Growth 2 Fiscal Legitimacy and Development 3

7 7 Growth Understanding Fiscal Space Fiscal Space The capacity of a government to provide financial resources for a desired purpose, subject to the constraint that the fiscal position is sustainable, both over the medium and long- term. Heller, P. Introduction to Fiscal Policy: Fiscal Elements of Growth and Development. Proceedings of G-20 Workshop. Istanbul, Turkey, July The gap between the current level of expenditure and the maximum level of expenditures a government can undertake without impairing its solvency Development Committee of the World bank-IMF Board on Fiscal Policy and Growth, The four pillars of Fiscal Space Source: Fiscal Policy: Fiscal Elements of Growth and Development. Proceedings of G-20 Workshop. Istanbul, Turkey, July 2007.

8 8 Growth Tax structure and channels of growth Taxation Source: Heady, C. Tax Policy for Growth. In Fiscal Policy: Fiscal Elements of Growth and Development. Proceedings of G-20 Workshop. Istanbul, Turkey, July Income taxes and Social Security Consumption Taxes Taxes on Property and Wealth Companies Profits Households Special tax SSC employer SSC employee Labour income tax General taxes (e.g. VAT) Taxes on specific goods and services Property State tax Wealth Tax Capital Income tax Affected drivers of growth: Employment, Human Capital Formation

9 9 Growth Tax structure is a creator of fiscal space Source: Latin American Revenue Statistics (LARS), OECD Development Centre, Paris. Based on data from ECLAC and OECD.

10 10 Growth Tax Policy and Growth: Implications Cutting corporate taxes may promote productivity growth and investment. Corporate taxes and Investment Source: Latin American Revenue Statistics, OECD Development Centre, Paris. Income taxes Reforming top marginal tax schedules may improve incentives: it could also increase inequality. Reforming labour/SSC taxes is more important for productivity in labour-intensive economies.

11 11 Growth 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 : To what extent do different tax provisions affect investment and productivity? Does the industry/firm structure matter for the impact of taxes? Is there a trade off among efficiency, equity, and simplicity? Source: Arnold, J., A. Johansson, C. Heady, B. Brys and L. Vartia.Tax and Economic Growth. OECD Centre for Tax Policy Administration /Economics Department Working Paper, 2008

12 12 Introduction 1 Fiscal Space and Growth 2 Fiscal Legitimacy and Development 3

13 13 Legitimacy Latin Americas fiscal stance has improved 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 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.

14 14 Source: Latin American Economic Revenue Statistics, OECD Development Centre, Paris. Based on ECLACs ILPES Database and OECD Revenue Statistics Database. Tax revenue for selected countries (Central Government, % GDP, 2006) Legitimacy However, fiscal recipes remain low

15 15 Source: Latin American Economic Outlook OECD Development Centre, Based on data by Goñi, López, and Servén (2006). Gini coefficient Inequality before and after taxes and transfers Legitimacy Fiscal Progressivity is not a matter of DNA

16 16 % of citizens who trust tax revenue is well spent ( ) Source: Latin American Economic Outlook OECD Development Centre, Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, Firms assessment of the neutrality/composition of government decisions/spending ( ) Fairer/ Wiser Unfair/ Wasteful Legitimacy Fiscal Legitimacy is low

17 17 Legitimacy More than quantity, is the quality of spending Source: OECD Development Centre, Based on PISA (2003) and OECD Education at a Glance (2005)

18 18 Source: Latin American Economic Outlook, OECD Development Centre, Based on ECLACs Panorama Social, Legitimacy Equity matters: Spending is often regressive

19 19 Conclusions Growth, Fiscal Policy and Development 1.Fiscal Space is not one-dimensional. 2.Improving the social contract between citizens (and firms) and 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 revenues and expenditures. 5.Tax administration matters: weak administration limits the ability to: -raise revenue -achieve a balanced tax structure -engage citizens in a tax-paying democracy

20 20 Thank you! To visit us:


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