The current crisis is showing once more the importance of efficient and well governed states when it comes to finding collective solutions to elementary problems. Tax systems will play a key role in absorbing the social and economic impact of the Covid-19 pandemic in developing countries and promoting a rapid and sustainable economic recovery afterwards.
The additional financial requirements for public budgets will be enormous, especially in poorer countries. Key sources of revenue, such as natural resource exports and tourism, have collapsed and it is not known for how long. The World Bank estimates, for instance, that Africa will see a 12 to 16 per cent fall in state revenues, depending on the extent of the crisis. Budget deficits are forecast to increase by 3.5 percentage points of GDP on average for 2020.
Many developing countries are still in the lockdown phase of the pandemic, where the emphasis is on tax relief measures, such as the deferral of tax payments to create short-term liquidity for businesses. This is followed by an easing phase, in which tax relief measures can be used to incentivise consumer spending and investment in order to get the economy moving again. Many industrialised nations currently find themselves in this phase, struggling to find a balance between providing effective tax incentives for the private sector and securing sufficient state revenue to finance the increased spending. By the end of the pandemic, if not before, it is also necessary to consider long-term measures for making public finance systems resilient and fit for the future.
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This blog first appeared on the DIE site.
Author: Christian von Haldenwang, Sabine Laudage, Armin von Schiller, DIE.
Image courtesy of Marco Verch via Flickr.
The views are those of the author and not necessarily those of ETTG.