asian development outlook 2014 special theme chapter ... · – india’s rice subsidy ......
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Asian Development Outlook 2014 Special theme chapter
Fiscal policy for inclusive growth in Asia
Dr. Donghyun Park, Principal Economist
Economics and Research Department, Asian Development Bank
The 5th IMF-Japan High-Level Tax Conference for Asian Countries
“Emerging Tax Issues in Asia”
Tokyo, Japan 21 - 23 April 2014
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Outline of presentation 1. Emerging case for inclusive fiscal policy
2. Public spending to foster inclusive growth
3. Public revenues to safeguard fiscal sustainability
4. Fiscal planning and innovation for a more
inclusive Asia
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1 Rapid growth has sharply reduced poverty in Asia
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0
2
4
6
8
10
0
8
16
24
32
40
Developing Asia Middle East and North Africa Latin America and Caribbean Sub-Saharan Africa
Annualized GDP growth rate, %
Cumulative reduction in poverty rate, percentage
points
Reduction in poverty at $1.25 a day (2005 PPP$) GDP growth
GDP growth and poverty reduction, 1990 - 2000
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1 ….. but income gaps are widening
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0 2 4 6 8 10
Indonesia PRC
Lao PDR Georgia
Bangladesh India
Korea, Rep. of Sri Lanka
Mongolia Taipei,China
Singapore Tajikistan
Increase in Gini coefficient, economies with rising inequality, 1990s - 2000s
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1 Asian governments are beginning to respond via fiscal policy
• International experience shows that public spending can reduce income inequality. – For example, education and health
• But in Asia, policymakers traditionally used fiscal policy primarily to support growth rather than to redistribute income
• More recently, growing concern about rising inequality is prompting a major re-think – e.g. PRC’s Harmonious Society
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1 Asian countries now face a tough dilemma
• How can the region use fiscal policy to promote inclusion while maintaining fiscal sustainability?
• Some expansion of public spending will be required, but this may jeopardize fiscal sustainability – Korea’s scale-back of basic old-age pension – Thailand’s price subsidy for rice farmers – India’s rice subsidy
• Therefore, Asian countries must strengthen their revenue base while they calibrate their spending
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Outline of presentation 1. Emerging case for inclusive fiscal policy
2. Public spending to foster inclusive growth
3. Public revenues to safeguard fiscal sustainability
4. Fiscal planning and innovation for a more
inclusive Asia
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2 Public spending has a bigger effect in reducing inequality • The evidence from advanced and developing
economies alike suggests that government expenditures have somewhat stronger impact on income distribution than revenues
• This general pattern is also true in developing Asia [Claus et al (2014)]
• However, crucially, revenues provide the resources required for inclusive spending
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2 Policy simulations re-confirm equity impact of public spending on education…
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2 …..and likewise for public spending on health
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2 Transfers and infrastructure can also contribute
• Targeted subsidies and transfers protect the most vulnerable and deprived segments of society.
• Moreover, replacing distortionary general subsidies with targeted assistance to the poor can contribute to growth – ADB analysis of fuel subsidy reform in India, Indonesia
and Thailand • Spending 1 percentage point of GDP more on
infrastructure can boost growth by an estimated 1.3 percentage points
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2 Asia lags other regions in fiscal spending to promote equity
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0
5
10
15
20
25
Education Health care Social protection
% Developing Asia Latin America & Caribbean OECD
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2 …..and the poor lag in access to vital services
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Percentage of children not in secondary school
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2 Benefit incidence and need for better targeting: some evidence from PRC – public pension spending
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2 Besides size of fiscal spending, its composition matters • Education policy can amplify how public spending
promotes inclusion by prioritizing basic education or expanding technical and vocational training to give students the practical skills and knowledge they need for work.
• Public health policy can do the same by dedicating the last dollar to a new rural clinic rather than to the latest medical marvel for the urban rich.
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Outline of presentation 1. Emerging case for inclusive fiscal policy
2. Public spending to foster inclusive growth
3. Public revenues to safeguard fiscal
sustainability
4. Fiscal planning and innovation for a more inclusive Asia
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3 Much of Asia currently has fiscal space….
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0 40 80 120
India Pakistan Malaysia Lao PDR
Viet Nam Myanmar Thailand
Philippines Armenia
Republic of Korea Hong Kong, China
Nepal Georgia
Cambodia PRC
Indonesia Kazakhstan
% of GDP
DA = 36.0
LA = 52.0
WLD = 80.8
OECD = 108.7
Gross government debt, selected economies, 2012
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3 …..but faces big future fiscal demands – e.g. health
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Share of public spending on health in GDP, 2010 (actual) and 2050 (projected)
-
2.0
4.0
6.0
8.0
10.0
12.0
Developing Asia Central Asia East Asia Southeast Asia South Asia The Pacific
2010 2050, projected
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3 …..big future fiscal demands – e.g. social security
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Share of public spending on social security and welfare in GDP, 2010 (actual) and 2050 (projected)
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Developing Asia Central Asia East Asia Southeast Asia South Asia The Pacific
2010 2050
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3 Also, Asia has comparatively limited revenue base….
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Tax revenues, share of GDP
7
14
21
28
35
Developing Asia Latin America & Caribbean OECD World
% of GDP
1990s 2000s
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3…..implying a clear need to improve revenue mobilization across all categories
2.9 3.7 3.5
7.6 2.3 1.7
6.3 13.0 10.1
3.0 1.7 1.6
8.5 4.8
3.0
28.3 25.4
19.8
0
5
10
15
20
25
30
OECD Latin America & Caribbean
Developing Asia
% of GDP
Composition of tax revenues and social contributions, 2010
Social contributions
Property
Indirect
Personal income
Corporate
Tax revenues and social contributions
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3 A wide range of options should be explored • Broaden base for personal income tax and VAT • Increase use of corrective taxes and nontax
revenues • Introduce progressive taxes on property, capital
gains, and inheritance • Improve collection and tax administration
through ICT
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3 Broaden base for personal income tax and VAT
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Ratio of top personal income tax threshold income to per capita GNP
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3 Corrective taxes and non-tax revenues
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Note: SES = socioeconomic status group
Some evidence from an on-going ADB study on tobacco taxes in the Philippines
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Outline of presentation 1. Emerging case for inclusive fiscal policy
2. Public spending to foster inclusive growth
3. Public revenues to safeguard fiscal sustainability
4. Fiscal planning and innovation for a more
inclusive Asia
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4 Medium term fiscal framework for inclusive growth • MTFFIG should systematize plans for incorporating
equity objectives into fiscal policy. • Such frameworks require careful annual review of
inclusive government programs • They must align concrete medium-term targets with
the means • Importantly, the inclusive elements must be integral
to the overall medium-term fiscal framework to preserve fiscal sustainability.
• MTFFIG requires more and better fiscal data, as well as strong political commitment
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4 Fiscal innovation for inclusive growth • Innovative measures can amplify how fiscal
policy contributes to inclusive growth. • For example, forging public–private partnerships
in social infrastructure can extend the reach of education and health care services.
• Such measures can provide additional financing for public services and improve their delivery, thus promoting equity.
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4 In a manner of conclusion….. • Fiscal policy can and should play a bigger role in
promoting inclusive growth in Asia. • To put the region on a growth path of broadly
shared benefits, Asian governments need to actively target inclusion in their fiscal plans.
• Because achieving inclusive growth is necessarily a long-term challenge, Asian policy makers must plan and act now.
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