We are now fast approaching the first anniversary of the UN Sustainable Development Goals (SDGs) – “a plan of action for people, planet and prosperity” – adopted 25 September 2015. In the run-up to the anniversary, this series will focus on various aspects of a new monitoring tool designed to measure impact and hold governments to account.
So far in this series, we have looked at resource gaps for poverty, education and health and how developing countries can bridge these gaps to achieve the Sustainable Development Goals (SDGs). But how does this work in practice? Based on our working paper The Affordability of the Sustainable Development Goals: A Myth or Reality? we selected five countries, two from the low income group (Ethiopia and Senegal) and the other three from the lower middle income category (Cambodia, El Salvador and Indonesia). This study allowed us to form a rough idea of the resources needed to achieve the SDGs.
Broadly speaking, a country’s ability to close the gap is based on its tax revenue, and there are three clear reasons for this. First, since the UN General Assembly unanimously adopted the 2030 Agenda, implementation is mainly the responsibility of the countries themselves, not NGOs or the private sector. Second, while tax is just one of many possible revenue sources for governments, it is arguably the most predictable and least volatile. Third, tax revenues can be directly controlled by governments, as opposed to other sources of income such as national resources, Official Development Assistance (ODA), or Foreign Direct Investment (FDI).
Tax revenues are used to finance a country’s needs in infrastructure, social services, and public goods; most of the budget is therefore already spoken for, and cannot be used to fill the resource gap. So a government looking to implement the SDGs has three options to increase its fiscal space: increase tax revenue, reshuffle the existing budget, or raise its income through other means (such as ODA). Some argue that none of these options are necessary. If there is sustained real GDP growth covering both inflation and population growth, total tax revenues will increase – thus creating fiscal space ‘automatically’ (so long as global import costs do not cancel out the gains). In other words, just fire up the economy, and there is no need to worry about the SDGs.
While we do not want to discard the importance of economic growth for development, we think it is highly unlikely that a country will consistently have a positive real GDP growth rate for 15 years, especially in today’s volatile global economy. Even if this is the case, the accumulated fiscal space will only be enough to fill the resource gap when the 15 years draw to an end. In other words, by the time sufficient money is available, the SDGs should have already been achieved. Ergo, governments have no choice but to increase fiscal space in the short run!
We argue that our sample countries should, without too much trouble, be able to increase tax revenue to at least the regional average of low and lower middle income countries. The resulting extra income can be used to at least partly fill the resource gap. When we look at the data (table 1), we find that – with the exception of Ethiopia – all our sample countries have revenues that are average or higher than average. Even if Ethiopia manages to raise its current revenue to the regional average, the resource gap will still be a whopping 8.26% of GDP. It seems that all our sample countries face considerable fiscal stress regarding the SDGs.
Table 1: Tax revenues and resource gap. (All values in % of GDP)
Regional averages for low and lower middle income countries are relatively low when compared to overall regional averages including upper middle and high income countries. This means there is considerable scope for catch-up. If the sample countries succeed, El Salvador and Indonesia can completely finance their resource gap, and Cambodia and Ethiopia will be able to decrease their gap by roughly half. Whether this is tenable however, remains a question.
Tax the poor or shuffle priorities?
First, the countries may not have the tax base to increase revenues significantly. Ethiopia, for example, has more than one third of its population living under the US$1.90/day poverty line. Taxing these people is simply unrealistic. Furthermore, all sample countries have on average incurred government deficits in recent years, making it likely that additional tax revenue will be used to balance the books before additional investments are made. So increasing tax revenue levels to the average for the entire region may not be tenable in the short run, pushing governments to seek other options.
The second option is to reshuffle the existing budget. With the exception of Senegal, all countries spend relatively less on health and education compared to the average low and lower middle income countries in their region. Moving it up to the average will go at least some way in relieving the fiscal stress. For Senegal, reprioritisation seems the logical option given its impressive tax revenue record of 19.18% of GDP.
The last option to reduce fiscal stress is ‘simply’ to generate more government income. SDG#17 calls on richer countries to fulfil their commitments to an ODA budget of 0.7% of GDP. As the SDGs were adopted unanimously, and given that our sample countries are unlikely to bridge the gap by increasing revenues or reprioritisation, a simple picture emerges. The SDGs will only be achieved when all countries – including richer countries – carry their fair share of the burden.
UN Photo/Stuart Price