Mobilising tax revenue for sustainable development in Asia

This article is authored by Yuho Myoda, Donghyun Park, Gemma Estrada and others.

Achieving the Sustainable Development Goals (SDGs) for a greener and more inclusive future will require vast public spending. Revenue mobilisation remains essential to many G20 economies to satisfy fiscal needs and support progress. Although the approach may vary across countries, the options holding universal promise include better use of value-added tax (VAT), rationalised tax exemptions, and appropriate taxation of the fast-growing digital economy. Strengthening personal income and property taxes can also boost their low revenue yield and make taxes more progressive. Corrective taxes can be effective to curb harmful consumptions and raise revenue for mitigating measures. Additionally, strengthening tax administration can help, and taxpayer morale can be buttressed by improving the quality of public spending.

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Developing economies face significant spending pressure. This includes substantial amounts required for education, health, energy, water supply and sanitation, and, in recent years, combating the consequences of climate change. The International Monetary Fund (IMF) estimates that additional annual spending needs will amount to $ 2.1 trillion in 2030 for emerging market economies. Fiscal pressure will remain beyond 2030—the target year for the SDGs. Achieving net-zero emissions by 2050 will also require massive investments in clean energy. The share of the aging population will increase rapidly in most countries, which will require higher spending on pensions and healthcare, while rising affluence may increase demand for public goods and services.

The Covid-19 pandemic increased pressure on the fiscal accounts by both increasing expenditure needs and decreasing revenue. Fiscal policy needs in response to the crisis were substantial, exceeding those mustered to deal with the global financial crisis of 2008–2009. In several developing countries, the response also involved central bank asset purchase programs, as reported in ADB’s Asian Development Outlook 2022. This policy brief draws heavily from Asian Development Outlook 2022: Mobilizing Taxes for Development. Low or negative growth curtailed tax receipts in 2020. At the same time, expenditure increased significantly in most economies. It is clear, therefore, that G20 economies must strengthen tax revenue mobilisation to fund the vast public spending needed to achieve the SDGs.

G20 economies with lower tax revenues rely more heavily on VAT and other consumption taxes. For some economies such as Indonesia, Mexico, Türkiye, and People’s Republic of China (PRC), the revenue from such taxes is less than 10% of Gross Domestic Product, despite their higher reliance on the taxes. Increasing tax revenue requires that governments make the most of the key revenue sources consistent with local priorities and capacities. In many countries, weak enforcement capacity can be further hamstrung by scarce third-party information on taxpayers from firms.

This article is authored by Yuho Myoda, Donghyun Park, Gemma Estrada and others.