Centre for Policy Dialogue (CPD)
OECD Global Forum on Development Paris: 28 January 2010
Exploring Fiscal Legitimacy and Social Contract in Low Income Economies: Relationship between Budgetary Allocation and Financing
Presentation by Debapriya Bhattacharya [email protected] and Mustafizur Rahman [email protected] CENTRE FOR POLICY DIALOGUE (CPD) B A N G L A D E S H a c i v i l s o c i e t y t h i n k – t a n k Centre for Policy Dialogue (CPD)
FISCAL LEGITIMACY
Fiscal legitimacy: “Negotiations between organized societal and political interests around substantial, consensual changes on both sides of the fiscal ledger and in the nature of governance – taxes, patterns of public expenditure, and mechanisms of representation and rights.” (Schneider, Aaron, Victor Lledo and Mick Moore, 2004)
Two sides of Fiscal Legitimacy Resource Mobilization Resource Utilization
“Fiscal contracts secure predictable, bargained tax revenues from organized tax-paying groups in return for giving those groups formal political representation and substantial influence over fiscal policy in particular, and public policy generally.” (Schneider, Aaron, Victor Lledo and Mick Moore, 2004)
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SOCIAL CONTRACT
Fiscal Social Contract Relationship between taxation, redistribution and the society.
The tax system of a country, which provides a snapshot of the social contract, binds the government and its citizens. (OECD, 2008)
Forms of Fiscal Social Contract Fiscal Social contract can be of two forms: 1. Explicit contract (e.g. constitutional rights) 2. Implicit contract (e.g. bargained fiscal policy with organized bodies)
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FISCAL SOCIAL CONTRACT IN BANGLADESH
Major Questions:
In a low income economy-
How transparent and representative the budgetary procedures are ?
Is there a relationship between revenue mobilization and public expenditure? How important is foreign aid flow?
What determines the revenue mobilization?
How did a government response during the crisis period?
Does political regime influence the public finance framework ?
Bangladesh can be an interesting case study.
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TRANSPARENCY AND REPRESENTATIVENESS
Budgetary Process in South Asian Countries Availability of Key Budget Documents Pre- Executive's In-year Mid- Year- OBI Budget Budget Citizens Enacted Year End Audit Country Rank Score Statement Proposal Budget Budget Reports Reviews Report Report United Kingdom 1 88 89 95 67 100 100 92 77 92 Sri Lanka 13 64 56 75 0 100 46 50 43 84 India 20 60 0 62 67 100 96 25 40 83 Nepal 41 43 0 50 0 100 54 83 7 59 Bangladesh 44 42 0 58 0 33 75 0 0 0 Pakistan 47 38 0 53 0 67 0 0 0 67 Source: Complied from country reports, Open Budget Index, International Budget Partnership, 2008 OBI score (from 0 to 100) indicates that to what extent a given country provides information in its budget documents – 81-100: extensive 61-80: significant 41-60 limited 21-40: minimal 0-20 little or no information.
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TRANSPARENCY AND REPRESENTATIVENESS
According to the survey, among the 85 countries, South Asian countries performed poorly. The scores indicate that information available in the budget documents of low income economies is rather limited. Bangladesh is ranked 42nd (among 85). 27 countries (32%) belong to the same category as Bangladesh (limited information). In recent years there has been increasing number of pre-budget consultations and proposals from relevant stakeholders presented to the Finance Minister as well as post-budget scrutiny– however monitoring at the implementation stage needs to be improved.
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RELATIONSHIP AMONG PUBLIC FINANCE FRAMEWORK
Correlation among different components of public finance in Bangladesh (Time Period: FY1973-FY2009) GDP Budget Revenue Development Total Income Foreign Budget Budget Revenue Tax Aid GDP 1.0000 Budget 0.9981 1.0000 Revenue 0.9893 0.9944 1.0000 Budget Development 0.9836 0.9764 0.9507 1.0000 Budget Total Revenue 0.9961 0.9986 0.9959 0.9707 1.0000
Income Tax 0.8608 0.8584 0.8601 0.8339 0.8551 1.0000
Foreign Aid 0.9211 0.9033 0.8763 0.9311 0.8955 0.8589 1.0000 As expected, the correlations among the major fiscal variables are very high. Both revenue mobilisation and foreign aid flow are highly correlated with total budget and its development related expenditure The budgetary components are also highly correlated with national income.
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RELATIONSHIP AMONG PUBLIC FINANCE FRAMEWORK
Trend of Change in Actual Development Expenditure and Change Revenue Collection (FY01-FY09)
Source : MoF, GoB. • Over the last decade or so, annual change in actual delivery of development expenditure (ADP) has roughly followed the trend in annual change of revenue earnings. • An earlier CPD study indicated that implementation of development expenditure (ADP) can be mostly explained by revenue collection. • This reconfirms the interrelation between the revenue mobilisation and expenditure side of budget.
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DETERMINANTS OF REVENUE MOBILIZATION
TAX-GDP AND REVENUE GDP RATIO OF NEIGHBORING COUNTRIES (FY09*)
Source: Budget Documents and Economic Reviews of the respective countries * Revised budget estimates for FY09 (actual FY09 figure for India) • Compared to her South Asian neighbors, revenue mobilization of Bangladesh is not spectacular.
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DETERMINANTS OF REVENUE MOBILIZATION
Determinations of Domestic Resources: (Time Period: FY1981-FY2008)
• Dependent Variable: total tax revenue (log)
• Per capita income has the highest positive influence
• Public sector investment - contributes to revenue generation
• Import - positively significant
• Share of modern sector - positive sign but insignificant
• Dummies for VAT & LTU – positive and significant; implies institutional measures taken
by the governments at different time have also positive impact on revenue generation
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DETERMINANTS OF REVENUE MOBILIZATION
Income tax as % of total revenue 25
20
15
10 Percentage 5
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1991 Fiscal Year Source : NBR. • The revenue mobilization in Bangladesh is mainly dependent on indirect taxes. This is regressive in nature.
• However, during last four years, income tax as share of total revenue is increasing – implies a positive step towards more equitable society.
• The initiatives of preceding caretaker government are carried over by the present elected government.
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FISCAL LEGITIMACY AND SOCIAL CONTRACT DURING THE CRISIS PERIOD
• Two consecutive fiscal stimulus packages (e.g. cash subsidy for export sector, credit lines, subsidy at production inputs etc.) were announced to tackle the negative impact of global recession on Bangladesh economy- – BDT 3,420 crore ($488.6 million) in April 2009 – BDT 5, 000 crore ($714.3 million) in June 2009
• Other counter cyclical measures include – – Enhancing public investment programme – Widening social safety net – Lower corporate tax rate – Lower duty on imports of industrial raw materials – Higher duty on imports of luxury goods – Provision for legalising undisclosed income
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POLITICAL INFLUENCE
Pattern of Public Expenditure in Bangladesh
Election Year Total Budget Revenue Budget Development Budget
1000 900 800 700 600 500
Billion TK Billion 400 300 200 100
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fiscal Year
Source : MoF, GoB.
Impact of an upcoming election on the government expenditure is limited .
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POLITICAL INFLUENCE
Pattern of Revenue Collection in Bangladesh
Election Year Total Revenue Tax Revenue Income Tax
800 700 600 500 400 300 200 100
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source : Different issues of Bangladesh Economic Review, MoF and Annual Report, NBR.
An election does not influence the revenue collection in Bangladesh.
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POLITICAL INFLUENCE
Determinants of Public expenditure:(Time Period: FY1991-FY2008)
• Dependant Variable: Log of Total Budgetary Allocation
• Per capita income (Proxy for level of economic development) has significant positive impact for both cases.
• Other economic variables e.g. import, economic structure of the country, revenue collection have no significant influence on public expenditure pattern.
• Political cycle (electoral) has no significant influence on public expenditure of that fiscal or the immediate previous fiscal.
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REVISITING THE QUESTIONS
• Bangladesh has to go a long way to establish a transparent and representative budgetary process.
• The revenue mobilization and public expenditure are highly correlated.
• There exists an interrelated macroeconomic framework ( “Investment- Growth-Public Finance Cycle” ) in Bangladesh economy.
• Government has been responsive during the crisis period.
• Political cycle (electoral) is not significant for the budgetary outcome.
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CONCLUDING REMARKS
• A transparent public expenditure framework at every level of the government has a leading role to establish of a tighter social contract. • Promoting demands in civil society for fair and transparent tax services strengthens the practical relationship between state and society. • A simple, fair and transparent system that operates with broad social consensus is important for good governance and compliance. • Emphasis should be placed on the composition of tax sources for equitable society. • Exemptions and leakages in revenue mobilization need to be reduced. • A broad-based but with low rate tax system is desirable.
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CONCLUDING REMARKS
• Improving the quality of public services deliverables should get priority. • Participation of local governments needs to be ensured in monitoring and evaluation. • Monitoring and evaluation institutions need to be strengthened in order to make public spending more transparent. • Economic factors (e.g. GDP and its composition), structural weaknesses etc. are more important compared to legitimacy issues for public finance outcome. • Development administration has an important role to play along with democratic administration. Fiscal legitimacy is crucial; it will still be handicapped if the above issues remain unnoticed.
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Thank You
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