Vitor Gaspar, the Director of the IMF’s Fiscal Affairs Department, talked at the plenary session ‘Digitalization of Public Finance: International Experience and Domestic Features’ during the Moscow Financial Forum – ‘Financial Systems of the 21st Century Competitive Economy: Challenges and Solutions’, Moscow, September 8, 2017.
The world is undergoing profound transformations powered by information and communications technology and increasingly by robots and artificial intelligence. These are often regarded as challenges for government policies and public administration.
The public is increasingly calling on governments to offset or mitigate the negative social and economic impacts of technological change, and at the same time the ability of governments to mobilize resources is being eroded by wider opportunities for tax avoidance and tax evasion. These concerns are real and policymakers need to take steps to address them.
At the same time, the digital revolution offers exciting new opportunities for public finance. In our forthcoming book, Digital Revolutions in Public Finance, the IMF is looking at possibilities for public finance in the XXI century.
Winning strategies will involve smart policies that facilitate transformation and change. It is important to realize that technology is not a panacea or an end in itself. It will serve whatever purpose societies choose. Moreover, technological revolutions take time and political will and vision are necessary to guide this lengthy process. And – as I will emphasize later – details matter.
Today, I will highlight the important roles of visionaries, architects and plumbers in realizing the opportunities for public finances offered by the digital revolution.
Visionaries: Pushing us to the frontier
Our book shows exciting possibilities to shape the frontiers of public finance in the digital age. These possibilities reflect how the government collects, processes, acts on and disseminates information. At a more fundamental level, public administration will be able to interact with the economy and civil society in new ways. The implications are far-reaching. Technology will allow governments to be more effective and efficient at what they are doing but, also, more fundamentally to design systems and policies in completely new ways.
The book illustrates and documents possibilities from the viewpoint of development economics. The pace of transformation is so fast and its implications so comprehensive that there are ample opportunities for developing economies to “leapfrog” to newer and more sophisticated policy formulation, design, and implementation. Smart policies will accelerate and shape the use of technology in society and thereby contribute to facilitate change and foster inclusive growth.
The book is full of examples of such smart policies, of countries that have been able to go beyond implementing international best practice. Often, they have been able to define best practice itself. Estonia stands out in providing government services online. Using an electronic identity card, citizens can vote online, consult medical records, and file taxes—just a few of the 600 e-services that the government offers.
Plumbers: Better pipes, fewer leaks
About a year ago, Esther Duflo, the MIT economist, argued, in her Richard Goode Lecture at the IMF, that caring about the plumbing – laying the pipes and fixing the leaks – is crucial and necessary. I have used her lecture as inspiration for the structure of my talk today.
A successful innovation program requires an interactive engagement of policymakers, experts and stakeholders. With new information and new capabilities offered through the digital revolution come a wide range of new possibilities for enhanced implementation of existing tax and spending policies. These include lower costs of tax collection and compliance, as well as of delivering public services, administering social programs, and managing public finances.
We have examples of successful interactions between policymakers and stakeholders. In Kenya, the money-transfer system M-Pesa originated a revolution in tax policy and administration. It included a web-enabled application for tax administration (the iTax System) and the possibility for taxpayers to pay taxes and access their tax information through their mobile phones (the M-service platform). The book describes these innovations, detailing the critical role of the monetary authorities and the telecommunications regulator in providing an appropriate legal and regulatory framework, and the importance of the modernization efforts of the Kenya Revenue Authority prior to the implementation of the iTax and M-service systems.
Another wonderful example of fruitful interaction between policymakers and stakeholders is documented in a paper by Muralidharan, Niehaus and Suktankar, 2016a (as quoted in Duflo, 2016). The paper analyses the MNGREGS program in India. The program is a demand-based workfare program. It provides up to 100 days of work for rural households.
However, the program was affected by widespread corruption. A careful randomized experiment was carried out to evaluate the effect of biometrically validated payments, through the use of smart cards. They found that leakages in payments were reduced and that delays in payments were shortened. Perhaps more important, the design of the experiment allowed for follow-up work on the effect of the policy on private sector wages.
Muralidharan, Niehaus and Suktankar reached a startling conclusion: by strengthening the effectiveness of the program in putting a lower limit on wages, it so reinforced the market position of the low paid that private sector employers were led to increase the wages they offered – and substantially: 90 percent of the gains accrued to individuals came from this general equilibrium effect.
The book includes a chapter by Susan Lund, Olivia White and Jason Lamb, who estimate that digitizing payments in developing countries can lead to savings between 0.8 and 1.1 percent of GDP, on an annual basis. Of this total about 0.5 percent of GDP corresponds to fiscal savings. The remainder corresponds to estimated gains for enterprises and individuals. The estimates are based on available data for seven countries: Brazil, China, India, Indonesia, Mexico, Nigeria and South Africa.
These seven economies correspond to more than 60 percent of GDP of all developing economies. The range of gains estimated, for this group of seven countries, is substantial. At the extreme we have Nigeria, with potential gains in the range from 1.0 to 1.7 percent of GDP, and South Africa, with 0.2 to 0.4 percent. The pecking order is clear: the more backward a country is in the adoption of digital payments, the higher estimated potential gains. In Nigeria and Indonesia, only 20 to 25 of the volume of transactions associated with government expenditures was digitalized. The proportion was even lower on the revenue side, with only 10 to 15 percent using digital channels.
It is remarkable that these estimates take only into account direct monetary savings. There are other possible benefits associated with increased use of digital payments by individuals and businesses: improving government service delivery; reductions in tax evasion and avoidance and a levelling of the playing field. Nevertheless, as the above experience with workfare in India shows, these indirect, general equilibrium effects, may well be substantially bigger.
This is not to say that digitalization can offer a perfect technological solution to fundamental policy and institutional problems. In Digital Revolutions, Ravi Kanbur, cautions against over optimism in viewing technology as a solution for difficulties in targeting public expenditure for poverty reduction. In addition, digitalization does not necessarily eliminate constraints brought about by political economy considerations, norms, and existing institutions.
Architects: Design shapes results
Greater access to information and enhanced digital systems and processing capabilities could also open up new options for policymakers. Our book offers some ideas on how the digital revolution might offer scope to rethink the design of tax systems.
Tax systems, which encompass tax policy and revenue administration, are based on the information the tax authority can access. Digital information affords better enforcement of existing rules; while access to richer information sets allows for improvements in the rules themselves. As Bas Jacobs explains in the book, as the available information set expands, policy design options also expand. For example, tax liabilities could be conditioned on not only the taxpayer’s current yearly income, but perhaps even lifetime income and wealth. By conditioning tax schedules on more information, the government can target income redistribution better and potentially in more efficient ways.
Digital systems present new roles for consumers and third parties in facilitating enhanced compliance.
The emerging peer-to-peer (P2P) economy, in which a digital platform intermediates transactions between individual buyers and sellers, has introduced organization and formalization to previously informal and perhaps undocumented activities.
Digitalization presents new opportunities, and in the book Aqib Aslam and Alpa Shah argue that digital platforms can act as crucial interlocutors for tax administrations by proving third party information or even acting as agents—by, for example, withholding taxes.
At the same time, if revenue administrations and policymakers approach digital revolutions in a passive way, they may well witness increased erosion of tax bases as individuals and businesses use new possibilities to engage in tax evasion or tax avoidance.
That may be particularly relevant for international taxation, an issue gets close attention in the book. Over recent years, digitalization has intensified challenges in international taxation by enabling an increasing number of companies, including many household names, to operate and sell electronically in multiple jurisdictions without having much of a physical presence there.
As discussed in the book’s chapter by Michael Devereux and John Vella, one approach to this problem is to widen the current notion of what it means to be active in a country for tax purposes. A more radical alternative is to change the nature of the corporate tax more profoundly, to impose the tax liability where consumers or shareholders are located, rather than where the business has a production-related presence. In both cases, digital technology is instrumental in implementation.
Conclusion
Digital revolutions in public finance open ample opportunities for countries all around the world. Such revolutions offer the promise of more inclusive societies, benefiting from lower transactions’ costs; more effective provision of public services; and a more transparent and accountable public administration. The possibilities cannot be fully grasped at present. However, technology is not a panacea. It is not an end in itself. It will serve whatever purposes societies choose. Visionaries, architects and plumbers will have to work hand-in-hand with a combination of vision, strategic thinking, political will, attention to detail and capacity to adapt. Although the outcomes of revolutions are inherently hard to predict, our book make clear that the effects of the current and future digital revolutions are likely to be profound.