Tax-to-GDP ratios increased in the majority of Asian and Pacific economies covered by a new OECD report published today. Nine of the economies in the publication increased their tax-to-GDP ratios between 2016 and 2017, compared with only three in the preceding year, according to Revenue Statistics in Asian and Pacific Economies 2019.
This sixth edition of Revenue Statistics in Asian and Pacific Economies covers 17 countries, including Vanuatu for the first time. Tax-to-GDP ratios across these countries varied considerably, ranging from 11.5% in Indonesia to 32.0% in New Zealand. In general, tax-to-GDP ratios were higher in the Pacific economies than in the Asian economies: Pacific economies had tax-to-GDP ratios higher than 24%, with the exceptions of Tokelau (14.2%) and Vanuatu (17.1%), while the Asian economies reported tax-to-GDP ratios below 18%, with the exceptions of Korea (26.9%) and Japan (30.6%, 2016 figure).
The increased revenue collection of most countries in 2017 was largely driven by economic factors rather than changes in tax policy or administration. These factors included higher revenues from oil production in Kazakhstan, the growth of the logging sector in the Solomon Islands and Vanuatu’s recovery from Cyclone Pam in 2015. Meanwhile, a fall in revenues from corporate income tax (CIT) and value added tax (VAT) resulting from an economic slowdown explained the decline in Papua New Guinea’s tax-to-GDP ratio. Over a longer timeframe, 11 of the 17 economies in the publication increased their tax-to-GDP ratios between 2007 and 2017, with the exception of Australia, Indonesia, Kazakhstan, Papua New Guinea, New Zealand and Vanuatu.
This publication also includes data on non-tax revenues for five Pacific economies (the Cook Islands, Papua New Guinea, Samoa, Tokelau and Vanuatu). These revenues, which include mainly grants, resource income (including fishing and mining) and other fees, were equivalent to at least 6% of GDP in the Cook Islands, Tokelau and Vanuatu. Grants exceeded 30% of total non-tax revenues in all five countries and were the main source of non-tax revenues for the Cook Islands (65.7%), Papua New Guinea (59.9%), Samoa (51.1%) and Vanuatu (52.2%).
The report is a joint publication of the OECD Centre for Tax Policy and Administration and the OECD Development Centre with the co-operation of the Asian Development Bank (ADB), the Pacific Islands Tax Administrators Association (PITAA) and the Pacific Community (SPC) and the financial support of the European Union.
Revenue Statistics in Asian and Pacific Economies 2019 includes a special feature exploring the operations of tax administrations in the region produced in collaboration with the ADB.
Tax revenues as a percentage of GDP
In 2017, tax-to-GDP ratios varied across the 17 economies, from 11.5% in Indonesia to 32.0% in New Zealand. Tax-to-GDP ratios in all Asian and Pacific economies in the publication were lower than the OECD average tax-to-GDP ratio of 34.2%.
Eight of the economies had tax-to-GDP ratios above the Latin American and the Caribbean (LAC) average of 22.8%.
Five countries (Fiji, Kazakhstan, Singapore, Solomon Islands and Vanuatu,) experienced increases larger than 1.0 percentage point between 2016 and 2017 while Malaysia and Papua New Guinea experienced the largest decreases (0.7 percentage points in both cases).
Over the last decade, tax-to-GDP ratios increased in 11 countries in this publication and declined in six. The highest increases were observed in Fiji and the Solomon Islands (4.4 and 4.5 percentage points, respectively) while the largest declines were registered in Kazakhstan and Papua New Guinea (9.7 and 7.0 percentage points, respectively).
In nine economies in this publication, taxes on goods and services accounted for the largest share of tax revenues in 2017. Within goods and services, VAT is an important and increasing source of revenues in most Asian and Pacific economies.
Income taxes provided the main share of tax revenues in the eight remaining countries with the exception of Japan, where social security contributions (40.4% of total tax revenue, 2016 figure) represented the largest source.
The tax structure of Asian economies tends to differ from that of Pacific economies:
VAT accounted for at least 25% of total tax revenue in the Pacific economies with the exception of Australia and Papua New Guinea, but less than 25% in the Asian economies, except Indonesia.
Revenues from CIT were higher than revenues from personal income tax (PIT) in most Asian economies, with the exception of Japan and Korea; whereas the reverse is true in the Pacific, except in Fiji.
Revenues from VAT ranged from 12.9% of total tax revenue in Australia (2016 figure) to 44.4% in the Cook Islands (the Solomon Islands and Tokelau do not impose VAT) and was higher as a share of total taxes in the Pacific compared to Asian economies.
Across all economies with the exception of Tokelau (which does not impose CIT) and Vanuatu (which does not impose income taxes), revenues from CIT ranged from 9.1% of total tax revenue in Samoa to 41.5% in Malaysia.
Amid Multiple Crises, Major Transformation of Commodity Markets Is Underway
Global commodity markets are being reshaped in lasting ways as a result of COVID-19, the war in Ukraine, and the impacts of climate change—a transformation that is likely to have profound implications for developing economies over the coming decades, a new World Bank study has found.
The study, Commodity Markets: Evolution, Challenges, and Policies, offers the first comprehensive analysis—encompassing all major commodities—of how these markets evolved over the past 100 years and the directions they are likely to take over the next 30. It predicts that growth in overall global demand for commodities is likely to decelerate as population growth slows and developing economies mature, although demand for some commodities is likely to rise.
Moreover, the transition to cleaner energy is likely to be challenging. Demand for metals necessary to build the infrastructure for renewable energy and to produce electric vehicles is likely to surge in the coming decades, driving up the price of metals and delivering windfall gains for countries that export them. Although renewable energy is fast becoming the lowest-cost source of energy in many countries, fossil fuels will probably retain some of their appeal, especially in countries with ample domestic reserves. In the short-run, with inadequate investment in low-carbon technologies—just one-third of the required level—energy demand could continue to outstrip supply, keeping prices at elevated levels.
“Amid overlapping crises over the past two years and the ongoing transition to lower carbon intensity, commodity markets are being reshaped,” said World Bank Group President David Malpass. “These changes will have major implications for growth and poverty reduction in developing economies, two-thirds of which are commodity exporters. A sound goal is for the shifts in commodity markets to encourage good outcomes for both development and environmental sustainability.”
The study also sheds new light on the causes and consequences of volatility in commodity markets, revealing a troubling insight for commodity exporters: it finds that price increases don’t materially boost economic growth for an extended period in developing countries. On the other hand, price declines tend to reduce growth significantly—and for several years.
“Boom-and-bust cycles in commodity markets are enormously disruptive to progress in developing economies—especially the poorest countries,” said Mari Pangestu, the World Bank’s Managing Director for Development Policy and Partnerships. “Still too many countries maintain an excessive dependence on exports of just a few types of commodities. The ongoing crises are a wake-up call for governments to renew their efforts to value their natural capital in a sustainable way, diversify their economies, and reduce their vulnerability to commodity shocks.”
The analysis shows that commodity-price shocks affect different commodity exporters in distinctive ways, demonstrating why policy solutions need to be tailored to reflect the specific circumstances of each country.
Policymakers can manage commodity-market shocks in at least three ways:
Fiscal, monetary, and regulatory frameworks: Governments should put in place a fiscal framework that uses periods of high prices to build rainy-day funds that can be deployed quickly in an emergency. Exchange-rate regimes need to be agile to work effectively in combination with well-defined monetary policy frameworks. Regulators should put in measures to prevent the accumulation of excessive financial-sector risks—especially with respect to capital inflows and foreign-currency debt.
Measures to moderate boom-bust cycles: Governments tend to resort to subsidies or trade protections to reduce the effects of commodity-price movements on consumers. Commodity-exporting countries often attempt to mitigate market volatility by reaching agreements to regulate supplies. History shows that such efforts usually are costly and counterproductive. A better approach is to adopt market-based risk mechanisms to limit exposure to price movements.
Economic diversification: Facing a long-term decline in fossil-fuel demand, countries that export such fuels should continue to diversify their economies. Low-income countries that depend heavily on agricultural exports would also benefit from reforms that help expand other sectors of their economy. These efforts can be aided by building human capital, promoting competition, strengthening institutions, and reducing distorting subsidies.
Focus on Quality Key to Effective Healthcare Reform in Developing Nations
Funding medical care projects in low- and middle-income countries with Performance-Based Financing (PBF) increases the number of patients treated but often falls short of improving the quality of health services offered, according to a new World Bank report.
Direct financing of frontline facilities may play a more important role in supporting impactful health financing reform, according to the Policy Research Report Improving Effective Coverage in Health: Do Financial Incentives Work?
“There are more than six million deaths from preventable causes each year,” said Carmen M. Reinhart, World Bank Senior Vice President and Chief Economist. “We need to focus on making sure people across the developing world have access to the quality medical care they need to prosper and achieve their full potential.”
PBF is a package intervention which relies on performance pay to health facilities and workers, with payments linked to the quantity and quality of services they deliver. It also includes autonomy, accountability, and community engagement. Government bureaucracies the world over deploy performance pay across sectors including education and health. Over the past two decades, PBF programs have been widely adopted in health with the aim of improving the stubbornly poor health outcomes in low- and middle-income countries despite sustained investments in health service delivery and service utilization. Since the late 2000s, more than US$2.5 billion has been invested in PBF projects in primary health service delivery in low-income countries, a significant departure from previous financing models, which had little link to outcomes and results.
The report finds that PBF projects produced gains in health outcomes compared with the status quo, although these gains did not necessarily result from the specific financial incentives and associated monitoring components of projects. Whereas transparency, accountability, and direct frontline facility financing produced results, the evidence from countries like Cameroon and Nigeria does not show additional benefits that outweigh the costs of performance pay to frontline workers. This is because many aspects of quality-of-care improvements are well outside the control of health workers. Evidence from several sub-Saharan African countries shows that only a third of the factors behind poor quality lie within the control of health workers, meaning the performance pay alone is not a silver bullet in this context. For example, a Nigerian program that directly funded facilities and supported autonomy and flexibility was half the cost but proved to be as effective as program that supported autonomy and flexibility, as well as including performance pay.
Impactful health financing reform might mean pivoting from performance pay while retaining other important aspects of PBF projects that do yield similar results. Health facilities can deliver better results when they have budget autonomy, flexibility, and unified payment systems, and health facilities’ budgets can be output oriented and impactful even without explicit performance pay.
The report focuses on the best policies to support effective coverage, a measure that adjusts simple coverage of care with the quality of care provided. The study covered millions of households and found that equitable access to affordable health care is not a reality for many women, men, children, and adolescents in the developing world. This is true both for basic services, such as maternal and child health, as well as for services aimed at preventing and treating the emerging threat of noncommunicable diseases.
Estimates of effective coverage and its two components for six conditions (pregnancy, child malaria, child diarrhea, hypertension, tuberculosis, and HIV) using household survey data establish that effective coverage—and by extension, quality of care—is currently still shockingly poor for many health conditions in many environments.
Performance pay may make sense in decentralized, high-quality health systems that already support facility financing and autonomy as well as accountability and transparency. However, its potential may be more limited in centralized, under-resourced health systems that have key gaps at various points. In addition, performance pay can incentivize the provision of inappropriate, unnecessary, or irrelevant care.
“At a time when COVID-19 pandemic has increased mortality and morbidity and caused severe disruptions to routine health services, it is extremely important to focus on the most effective reforms to improve access to high-quality health care,” said Mamta Murthi, World Bank Vice President for Human Development. “This is an unprecedented opportunity to rethink the way countries build health systems, finance them, and deliver services towards the goal of health for all.”
Urgent Action Needed to Ensure a Resilient Energy Transition Amid Severe Global Challenges
A special report on the state of the global energy transition, released today by the World Economic Forum indicates that urgent action is required by both private and public sectors to ensure a resilient transition as the world faces the most severe energy crisis since the 1970s. According to the report, Fostering Effective Energy Transition 2022, the urgency for countries to accelerate a holistic energy transition is reinforced by high fuel prices, commodities’ shortages, insufficient headway on achieving the climate goals and slow progress on energy justice and access.
Building on 10 years of the Energy Transition Index, an annual country benchmarking report, this special edition report, launched in collaboration with Accenture, details key recommendations for governments, companies, consumers and other stakeholders on how to progress the energy transition.
Prioritizing a resilient energy transition and diversification of the energy mix is crucial in responding to energy market volatility. To accelerate the transition to cleaner energy supply and demand, the report notes that more countries need to make binding climate commitments, create long-term visions for domestic and regional energy systems, attract private sector investors for decarbonization projects and help consumers and the workforce adjust.
“Countries are at risk of future events compounding the disruption of their energy supply chain at a time when the window to prevent the worst consequences of climate change is closing fast,” said Roberto Bocca,Head of Energy, Materials and Infrastructure, World Economic Forum. “While there are difficult decisions to be taken to align the imperatives of energy security, sustainability and affordability in the short term, now is the time to double down on action.
The report also reveals the structural barriers to balancing energy affordability, security and availability with sustainability. This is due to compounded shocks to the energy system from a post-pandemic surge in energy demand, fuel supply bottlenecks, inflationary pressures and reconfigured energy supply chains as a result of the war in Ukraine.
To navigate this challenging situation, countries must pursue diversification on two fronts – not only in the domestic energy mix in the long term but also in considering their fuels and energy suppliers in the shorter term. Most countries rely on just a handful of trade partners to meet their energy requirements and have a deficient diversification of energy sources, providing limited flexibility to deal with disruptions. The report notes that of 34 countries with advanced economies, 11 rely on only three trade partners for over 70% of their fuel imports.
“The current energy crisis reveals just how important energy is to people and the economy,” said Espen Mehlum,Head of Energy, Materials and Infrastructure Programme for Benchmarking, World Economic Forum. “It is now critical to tackle the structural risks that have become evident while also increasing momentum on climate action. Success will largely hinge on policy and investments. Prioritizing energy efficiency and ramping up investment in clean energy infrastructure, renewables, clean hydrogen and new nuclear capacity can strengthen energy system resilience and will be a win-win for reducing emissions.”
Muqsit Ashraf,aSenior Managing Director and Global Energy Business Lead, Accenture, said: “Governments need to invest in decarbonizing their energy systems while securing affordable energy supply and companies should look to adopt low-carbon technologies and energy-efficient processes. A key area of focus should be value chain and industrial decarbonization initiatives, which hold great promise for emissions reductions, particularly when they involve collaboration across multiple stakeholders, including customers, suppliers and regulators, on initiatives like circular supply networks and CO2 handling infrastructure.”
There’s also a need to protect consumers and ensure affordable access to energy
“While navigating this challenging energy and materials landscape, companies have to help protect against rising costs of living for consumers, including in transportation, utilities and electricity,” said Kathleen O’Reilly,Global Lead, Accenture Strategy. “Vulnerable populations in particular, who most feel the impact of volatile energy prices and their impact on other basic goods and services, must be a strategic focus in a transition to sustainability that is equitable in value and scalable in impact. A key facet of this involves defining financial mechanisms to help vulnerable consumers cope with economic shocks, while not reducing incentives for companies to focus on energy efficiency and adoption of sustainability services”.
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