OPTIONS TO CREATE ADDITIONAL

FISCAL SPACE FOR ADHERENCE

TO THE SOCIAL PROTECTION
AGENDA OF THE SDG
Juan M. Villa
Global Development Institute

Disclaimer: The views expressed in this document are the views of the author(s) and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB does not guarantee
the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice,
opinion, or view presented, nor does it make any representation concerning the same.

ADBADBI Learning Program on Financing Social Protection for Sustainable Development Goals
15-16 February 2017, Seoul, Republic of Korea
CONTENT
Background
Creating fiscal space
Considerations in creating fiscal space
Financing options
Bottom line

ADBADBI Learning Program on Financing Social Protection for Sustainable Development Goals
15-16 February 2017, Seoul, Republic of Korea
BACKGROUND
Cichon and Hagemejer (2007): closing the social
protection gab demands at least US$380 billion

ILO recommendation R202.

High level panel (Bachelet, 2011)
Close the gap with progresive taxation.

Taxation is limited, alternatives must be considered

Monetary policy?
Foreign exchange reseves? (Ortiz et al., 2011).

ADBADBI Learning Program on Financing Social Protection for Sustainable Development Goals
15-16 February 2017, Seoul, Republic of Korea
BACKGROUND
As Chapter 1 shows, filling the social protection gap of the
SDGs implies an increase in spending by 30% in many
countries.

This chapter shows that the social protection gap can be

filled by reducing energy subsidies and further tax efforts.

Increase conventional tax rates is an option of last resort.

ADBADBI Learning Program on Financing Social Protection for Sustainable Development Goals
15-16 February 2017, Seoul, Republic of Korea
Creating fiscal space
Who will benefit directly from closing the gap.
This is a fundamental question.
It determines the political economy aspect of taxation towards
social protection (social contract).

Workers w/ social Insurance Workers w/o social Insurance

Follow the Bismakian model of Unprotected from risks.
social insurance. Must be covered with social
Pay direct taxes that fund social assistance.
protection for workers with no social Financed with general government
insurance. revenues.

ADBADBI Learning Program on Financing Social Protection for Sustainable Development Goals
15-16 February 2017, Seoul, Republic of Korea
 Creating fiscal space
ADBs Social Protection Index (2013): sets a benchmark
of 25% of GDP to be spent on SP.
.4

.4
UZB UZB
.3

.3
MNG MNG
SPI

SPI
.2

.2
AZE AZE
FSM FSM
KGZ MYS KGZ MYS
TMP VNM GEO CHN TMP CHN
VNM GEO
LKA THA LKA THA
.1

PHLARM
MDV
.1 PHL ARM
MDV WSM
NPL WSM NPL
FJI FJI
IND
AFG
SLBBGD PAK
TJK BTN
IDN BGD PAK IDN
AFG
BTN TJK
SLB
KHM LAO
VUT KHM LAOVUT
PNG PNG
0

0 5000 10000 15000 20000 25000 10 20 30 40 50

GDP per capita (USD - PPP) Central government revenues as % of the GDP

ADBADBI Learning Program on Financing Social Protection for Sustainable Development Goals
15-16 February 2017, Seoul, Republic of Korea
Creating fiscal space
The scope of taxation to finance social protection.
In some contexts social protection has been financed with natural
resources rents, no one is taxed at all.
PAK

80
PAK
60 UZB

PHL
However, the IND PHL THA

willingness to pay taxes

40

SGP
to subsidy the poor IND THA AZE
KGZ
shows a decreasing MYS
AZE
UZB
KGZ
trend with the SPI
20

MYS
GEO
GEO SGP

0 .1 .2 .3 .4
Social Protection Index
Low income respondent
High income respondent
Considerations
Taxes and growth.
There is a consensus on which taxes are more harmful to
economic growth (ordered from the most to the least harmful):
Corporate income
tax

Personal income tax

VAT and exercise

tax

Import tariffs

Residential property
taxes
 Considerations
Taxes and growth.
Goal 10 of the SDGs establishes a clear mandate to reduce
inequalities within and among countries.
There is a trade-off between indirect taxation and redistribution.

Direct taxation indirect taxation

Can be progressive and pro-poor. Less harmful for growth.
Investment and economic activity Distributive concerns.
concerns.

Not all taxes must be progressive. The whole fiscal system must
lead to redistributive outcomes.
This actually what the SDGs are doing.
Considerations
Redistribution through the pension system in Chile
Considerations
Spending efficiency, how to optimize outcomes to expand
coverage. E.g. health and education spending (Herrera
and Pang, 2005)
MDV 0.54
BHR 0.43
WSM 0.58
MYS 0.52
MNG 0.62
VUT 0.58
PNG 0.63
THA 0.61
UZB 0.64
UZB 0.61
TKM 0.64
MNG 0.63
TJK 0.65
WSM 0.67
KGZ 0.65
KAZ 0.69
NPL 0.66
FJI 0.69
ARM 0.66
AZE 0.69
BGD 0.67
NAM 0.70
KHM 0.68
BGD 0.70
VNM 0.68
IND 0.70
VUT 0.68
GEO ARM 0.71
0.69
PAK 0.69 GEO 0.71

FJI 0.70 PAK 0.71

LKA 0.72 KGZ 0.71

CHN 0.72 TKM 0.72
IND 0.72 TJK 0.72
AZE 0.72 PNG 0.73
KAZ 0.73 VNM 0.79
BRN 0.74 NPL 0.81
PHL 0.75 PHL 0.81
IDN 0.77 LKA 0.84
THA 0.79 IDN 0.90
MYS 0.95 CHN 0.95

0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1

Health efficiency: life expectancy Education efficiency: prim. education enrolment

Considerations
Spending reallocation in Thailand:
2.5

1995

1996 1997
2

1998

2009
1999
2008
2000 2011
1.5

2001 2010
2013 2014
2012
2002 2007
2003

2004 2006
2005
1

2 3 4 5 6
Public health spending as % of GDP
 Considerations
Shadow economy
Determines the extent to which countries fail to collect taxes
60.0

52.0

50.0 47.8 48.2

46.0

42.2

40.0 38.3 38.4

36.0
34.1
% of GDP

29.6
30.0 28.0

20.7
20.0 17.9
16.4
14.4
11.9

10.0

0.0
MYS

AZE
KAZ
MNG

THA
NPL
CHN

TMP

PHL

MMR
VNM

IDN

IND

LAO

KHM
LKA
Size of the shadow economy % of GDP
 Considerations
Tax effort
Depends on taxing capacity and actual collection

Le et al. (2012) Fenochietto and Pessino (2012)

Country
Tax capacity Tax effort Tax capacity Tax effort
Azerbaijan 25.01 1.09
Cambodia
China 15.64 0.68 39.10 0.49
India 11.18 1.12 29.60 0.53
Indonesia 15.10 1.15 28.00 0.47
Kazakhstan 14.62 0.56
Lao PDR
Malaysia 19.38 1.12
Mongolia 15.21 2.24 41.80 0.82
Myanmar
Nepal
Philippines 15.51 0.98 23.70 0.58
Sri Lanka 14.07 1.10 21.90 0.64
Thailand 17.62 1.12 36.70 0.50
Timor-Leste
Vietnam 14.35 1.66 36.80 0.66
 Options
Central government revenues and expenditure as
percentage of the GDP (circa 2014)
80

60

40
% of GDP

20

0
MNG

MDV
VNM

KHM

TON

ARM
LAO

LKA

PNG

SLB

VUT

BRN

HKG
IND

NPL

PHL
THA

IDN

UZB

KIR
KAZ

MYS

PAK

TJK
MMR

FSM
TMP

AFG

BTN

BGD

KGZ
CHN

AZE

WSM

FJI

SGP
GEO
-20

-40

Central Gov. revenues Central Gov. expenditure Balance

Options
Corporate (CIT), personal (PIT) and value added (VAT)
tax revenues (circa 2013).
HKG

KIR

BGD

MDV

MNG

THA

KAZ

MYS

CHN

AZE

IDN

VNM

PHL

NPL

KHM

LKA

IND

MMR

LAO

0 2 4 6 8 10 12 14
% of Gdp

CIT PIT VAT

 Options
Options are ordered from the least to the most distortive:

Energy subsidies Higher tax effort, Raising tax rates

Natural resources
reallocation reducing tax
rents
evasin
 Options
Natural resources
40

50
Central government expenditure as % of GDP

BRN
SLB
SLB
30

40
PNG PNG
GEO MMR
WSM
FJI
ARM KAZ MNG BRN AZE
MDV THA
20

30
KGZ
VNM UZB GEO KGZ
TJK CHN TJK
LAO
TON IND NPL LAO TON ARM VNM
KIR PHL AFG MYS
SGP IDN CHN
AZE
THA UZB KAZ
NPL
10

20
PAK PAK
LKA
TKM HKG KHM IDN
AFG PHL

BGDIND
10
0

0 10 20 30 40 0 10 20 30 40
Natural resources rents as % of GDP Natural resources rents as % of GDP
 Options
Energy subsidies reallocation (by component)

30.0

25.0

20.0
% of GDP

15.0

10.0

5.0

0.0
MYS

MNG
LKA
KHM

MMR

NPL

VNM

PHL

HKG
THA

AZE

IDN

IND

PNG
KAZ

ARM

BRN

TKM

UZB
TJK
CHN

GEO

BGD

KGZ
Pre-tax subsidies Global warming Local air pollution
 Options
Energy subsidies reallocation (by product)
40.0

35.0

30.0

25.0
% of GDP

20.0

15.0

10.0

5.0

0.0
MYS

MNG
PHL

NPL

MMR

LKA
KHM

VNM

THA

AZE

IDN

IND

PNG

HKG
KAZ

ARM

BRN

TKM

UZB
TJK

BGD
CHN

GEO

KGZ
Petroleum Coal Natural Gas Electricity
Options
Energy subsidies reallocation (by product)
Examples:
Islamic Republic of Iran: from paying US$0.40 per gallon of refined fuel
in 2010 to US$1.20 in 2012
Creation of a cash transfer scheme, universal coverage.

Armenia: state-owned firms producing subsidized electricity.

The tariff per kilowatt (hour) was raised from AMD$10 to AMD$30.
The Poverty Family Benefit was launched in compensation.

Indonesia: withdrawal of fuel subsidies.

gasoline price rose by 87.5 percent and kerosene by 185.7 percent.
Introduction of the CCT, Program Keluarga Harapan (PKH)
Options
Tax effort, reducing evasion
Estimated forgone tax due to the shadow economy
Size of the shadow Forgone Forgone Forgone Total forgone
Country economy VAT CIT PIT tax
Azerbaija
n 52.0 4.9 4.5 1.7 11.1

Cambodia 46.0 3.5 1.5 0.5 5.4

China 11.9 0.8 0.5 0.2 1.4
India 20.7 0.8 1.0 0.5 2.3

Indonesia 17.9 0.8 1.0 0.2 2.0

Kazakhsta
n 38.4 1.9 5.0 1.4 8.3
Lao PDR 28.0 1.3 0.3 0.6 2.2
Malaysia 29.6 3.8 1.0 4.8
Mongolia 16.4 1.5 0.6 2.1
Myanmar 47.8 1.8 2.3 4.2
Nepal 36.0 1.2 0.5 2.8 4.5
Philippine
s 38.3 1.4 2.2 1.3 4.8
Sri Lanka 42.2 2.2 0.9 0.2 3.3
Thailand 48.2 4.2 5.4 1.5 11.1
Timor-
Leste 34.1
Vietnam 14.4 0.7 0.6 0.1 1.4
Options
Tax effort, reducing evasion
What to do?
Carrot or stick?
Recent experimental evidence in formalizing firms and workers

Sri Lanka experiment (Mel et al., 2013).

No penalizing enforcement.
Information on how to formalize.
Information + monetary incentive.
FINDING: registration and tax formality increased by 48% by giving
information + Rs$40,000
 Options
Raising taxes
Current tax rates

45

34.6 35 35

32
30 30 30 30
Tax rate

26
25 25 25 25 25 25 25
24 24

20 2020 20 20 20 20
18
17
15 15

12 12 12 12
11
10 10 10 10 10 10 10 10 10

7
6
5

KAZ MNG TMP LKA KHM LAO AZE MMR NPL MYS IDN PHL IND THA VNM CHN

VAT* CIT PIT (max)

 Options
Raising taxes
Tax rate productivity

0.59
Tax revenues / Tax rate

0.44

0.40
0.38
0.36
0.34 0.34 0.34
0.30 0.30
0.26
0.25
0.23
0.21
0.18 0.18
0.16
0.14
0.12 0.11
0.09 0.10
0.08 0.09
0.07 0.06
0.06 0.05 0.06
0.03 0.04 0.05
0.02 0.03 0.03 0.03 0.03
0.02

AZE KHM CHN IND IDN KAZ LAO MYS MNG MMR NPL PHL LKA THA

VAT* CIT PIT (max)

Options
Raising taxes
There is a limit, what is known as the Laffer curve
Options
Raising taxes
Proposed maximum tax rates
VAT CIT PIT
Country
Current Maximum Current Maximum Current Maximum

Azerbaijan 18 18 = 20 20 = 25 25 =

Cambodia 10 15 + 20 27.5 + 20 30 +
China 17 17 = 25 25 = 45 45 =
India 15 15 = 30 30 = 34.6 34.6 =

Indonesia 10 17 + 25 25 = 30 30 =

Kazakhstan 12 18 + 20 20 = 10 25 =

Lao PDR 12 17 + 24 24 = 24 24 =

Malaysia 6 18 + 25 25 = 26 26 =

Mongolia 10 17 + 10 25 + 10 20 =

Myanmar 5 10 + 25 25 = 25 25 =
Nepal 12 12 + 20 20 = 25 25 =

Philippines 12 17 + 30 30 = 32 22 =

Sri Lanka 11 16 + 30 30 = 15 20 +

Thailand 7 17 + 20 20 = 35 35 =

Timor-Leste 0 12 + 10 20 + 10 25 +

Vietnam 10 15 + 20 20 = 35 35 =
Bottom line
Current conditions like macroeconomic context, prices
and institutional capacity are kept constant.
Natural resources are considered to contribute with at
least 1 percent of the GDP for each 5 percent of the GDP
of natural resources rents.
Energy subsidies are considered to contribute with total
pre-tax subsidies and 50 percent of post-tax subsidies.
Countries can make tax efforts to collect at least 50
percent of forgone taxes from what has been calculated in
the shadow economy.
Taxes are fully raised to the maximum proposed level.
 Bottom line
SP-SDGs deficit (% of GDP) New tax revenues to cover social protection financing gap (% of the GDP)
Country Energy Energy
subsidies subsidies VAT CIT PIT Raising Raising Raising
Lower estimate Upper estimate Natural resources (pre-tax) (post-tax) effort effort effort VAT CIT PIT TOTAL

Azerbaijan 2.6 8.77 5.0 3.8 8.8

Cambodia 4.0 14.1 1.0 0.0 0.3 1.8 0.7 0.2 2.1 0.6 0.3 7.0

China 0.2 1.7 1.0 0.1 0.6 1.7

India 6.6 11.3 1.0 1.7 4.9 0.4 0.5 0.2 8.7

Indonesia 3.7 7.0 1.0 5.3 0.4 0.3 7.0

Kazakhstan 1.0 3.9 3.9 3.9

Lao PDR 6.5 10.3 3.0 1.3 0.3 0.6 1.3 6.5

Malaysia 0.1 6.0 1.0 1.9 0.5 3.4

Mongolia 2.5 7.7 4.0 3.0 0.7 7.7

Myanmar 7.2 13.6 2.0 0.0 0.6 1.8 2.3 0.5 7.2

Nepal 5.1 14.7 1.0 0.6 1.2 0.2 2.8 5.8

Philippines 5.9 9.6 0.9 1.4 2.2 1.3 0.9 6.6

Sri Lanka 0.6 2.9 0.5 0.6 1.1 0.4 0.1 2.7

Thailand 0.6 5.1 0.3 2.2 2.1 1.4 6.0

Timor-Leste 7.2 14.7

Vietnam 1.4 7.4 1.0 0.7 0.3 0.3 0.3 0.0 2.7
Final remarks
The purpose of this chapter was to determine the extent
to which a selected group of countries can mobilise
resources to finance the social protection agenda of the
SGDs.
Among financing options, the suggested sources were
ordered according to their impact on growth, and
redistribution potential.
The calculations in this chapter have shown that all
countries can meet at least the lower estimates of the
financing needs.
Overall, it is apparent from these calculations that unless
countries adopt specific strategies to increase taxation
through enforcement or other means, the social protection
gap will not be filled.
Thank you!
juan.villa@manchester.ac.uk