Download Fiscal Legitimacy and Social Contract

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
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a c i v i l s o c i e t y think – 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
Country
Rank
United
Kingdom
1
Sri Lanka
13
India
20
Nepal
41
Bangladesh
44
Pakistan
47
Availability of Key Budget Documents
Executive's
In-year MidYearBudget
Citizens Enacted
Year
End
Audit
Proposal
Budget Budget Reports Reviews Report Report
OBI
Score
PreBudget
Statement
88
89
95
67
100
100
92
77
92
64
60
43
42
38
56
0
0
0
0
75
62
50
58
53
0
67
0
0
0
100
100
100
33
67
46
96
54
75
0
50
25
83
0
0
43
40
7
0
0
84
83
59
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
Budget
Development
Budget
Total
Revenue
Income
Tax
GDP
Budget
Revenue
Budget
Development
Budget
Total Revenue
1.0000
0.9981 1.0000
0.9893 0.9944
1.0000
0.9836 0.9764
0.9507
1.0000
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
Foreign
Aid
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
Percentage
20
15
10
5
2009
2008
2007
2006
2005
2004
2003
Fiscal Year
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
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
Billion TK
700
600
500
400
300
200
100
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
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
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
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 ( “InvestmentGrowth-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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