While disclosing how tax revenues are spent will require added work for governments, added transparency could benefit them in the long term. We explain why.
By Joe Dalton and Aidan Manktelow
Photo credit: Thomas Koehler, Getty images
Governments are increasingly finding themselves under the spotlight as the tax transparency debate continues to evolve. While multinationals may be challenged on how much tax they pay, governments are challenged on how they spend their revenues.
Brazil’s Football World Cup in 2014, billed as a way to showcase the country’s culture and growing stature as the world’s seventh largest economy, instead kicked off with controversy over unfinished infrastructures and protests outside resplendent stadiums by thousands demanding better health, transportation and education services.
In the United Kingdom, the activist group UK Uncut pairs its criticism of corporate tax avoidance with protests against reduced government services in the budget. The EU has faced calls to create an investment fund to pay for infrastructure. Government inspectors in the United States regularly make headlines with lists of wasteful spending projects.
Around the world, scrutiny of how governments spend tax revenue is the flip side of the additional transparency demands on taxpayers, leaving many officials feeling pressure to respond to constituent concerns.
“As many governments are facing economic crisis and imbalanced budgets, there is much more focus on the efficiency of the dollars that they spend on certain programs. And, of course, these issues are being discussed much more than they were in the past,” says Jean-Pierre Lieb, EY’s EMEIA Tax Policy Leader and former Director General of the tax authority in France.
Are governments opening up on spending?
While many taxpayers may see voting to remove an incumbent government from office as their primary means of holding them to account for misspending tax revenues, the rise of the tax transparency agenda may ultimately mean that citizens get a greater say over how tax revenue is spent.
International transparency initiatives are driving some countries to become more transparent about where revenues are spent. The Extractive Industries Transparency Initiative (EITI), for instance, has led to the increased disclosure of payments made to governments by the extractive sector and, therefore, increased the accountability of tax-collecting authorities and governments.
Photo credit: Thomas Koehler, Getty images
Governments are increasingly finding themselves under the spotlight as the tax transparency debate continues to evolve. While multinationals may be challenged on how much tax they pay, governments are challenged on how they spend their revenues.
Brazil’s Football World Cup in 2014, billed as a way to showcase the country’s culture and growing stature as the world’s seventh largest economy, instead kicked off with controversy over unfinished infrastructures and protests outside resplendent stadiums by thousands demanding better health, transportation and education services.
In the United Kingdom, the activist group UK Uncut pairs its criticism of corporate tax avoidance with protests against reduced government services in the budget. The EU has faced calls to create an investment fund to pay for infrastructure. Government inspectors in the United States regularly make headlines with lists of wasteful spending projects.
Around the world, scrutiny of how governments spend tax revenue is the flip side of the additional transparency demands on taxpayers, leaving many officials feeling pressure to respond to constituent concerns.
“As many governments are facing economic crisis and imbalanced budgets, there is much more focus on the efficiency of the dollars that they spend on certain programs. And, of course, these issues are being discussed much more than they were in the past,” says Jean-Pierre Lieb, EY’s EMEIA Tax Policy Leader and former Director General of the tax authority in France.
Are governments opening up on spending?
While many taxpayers may see voting to remove an incumbent government from office as their primary means of holding them to account for misspending tax revenues, the rise of the tax transparency agenda may ultimately mean that citizens get a greater say over how tax revenue is spent.
International transparency initiatives are driving some countries to become more transparent about where revenues are spent. The Extractive Industries Transparency Initiative (EITI), for instance, has led to the increased disclosure of payments made to governments by the extractive sector and, therefore, increased the accountability of tax-collecting authorities and governments.
“Governments should investigate the potential benefits offered by the changing transparency landscape.“
In the Democratic Republic of the Congo, for example, recent EITI reports helped identify a shortfall of US$26 million in royalty tax collections not properly accounted for by authorities.
The EITI also encourages informed debate among citizens about how revenues generated from the oil and gas sector should be used, putting pressure onto member governments to be more open about how they spend their revenue.
“The increased availability of this data will enable extractive stakeholders, analysts, journalists and citizens themselves to engage in debate about the management of natural resources, the impact this has on the economy, the medium- and long-term perspectives of the extractives sector and how revenues are shared between owners, operators and all levels of government,” EITI said in a recent progress report.
“EITI data will also create a better understanding of the volatility of the sector, optimal taxation regimes and, crucially, how mineral wealth translates into social benefits.”
The pressure’s on governments to open their books
In addition, civil society organizations such as the International Budget Partnership (IBP) and NGOs such as the Publish What You Pay (PWYP) coalition are also applying pressure on national governments to open their books. The IBP has created the Open Budget Index that assesses the transparency of government spending around the world.
Some governments are launching their own programs to increase transparency around where tax revenue is spent. As one example of this, in October, the UK Government, for the first time, sent a personal tax statement to its citizens detailing pound by pound how their tax payments contribute to public spending.
EY’s Jean-Pierre Lieb points out that countries such as Australia, Canada and France have appointed judicial bodies to control public accounts and issue a public statement on the quality and the fairness of public accounts. “These bodies will ensure that the money spent on those programs is well used and that there is a real economic or financial impact,” he says.
Citizens being directly consulted on government programs is perhaps the most transparent approach available to deciding government spending and taxation policies. Switzerland is one example of a country taking this approach, where direct votes by citizens are still held to approve budgetary measures.
Why transparency is good for governments
While disclosing how tax revenues are spent will require added work on the part of governments, transparency could benefit them in the long term. A government that responds more specifically to the priorities of its citizens will clearly be able to better target spending, which could boost its chances for officials’ re-election.
“The more transparency there is from governments about where they are spending revenue, the more individuals, electors and communities can assist those judgments and hopefully ensure that they align with the expectations and the aspirations of the people who our legislatures represent,” argues David Bradbury, Head of the Tax Policy and Statistics Division at the OECD.
New Zealand features at the top of the IBP’s Open Budget Index and similarly scores highest on the Corruption Perceptions Index 2013. It could be argued, therefore, that greater transparency from government helps to engender trust among the population.
The Open Budget Index suggests several other advantages of governments disclosing its tax receipts and spending:
- It closes the door to waste and misappropriation of public funds.
- It can lead to more efficient and effective government spending.
- It helps governments to match national resources with national priorities.
- It supports government efforts to manage debt.
- It helps governments to secure cheaper international credit.
- It helps build trust between governments and citizens and empowers citizens by giving them a voice on government spending.
Of course, open budgets bring their own challenges too. While a small country like Switzerland has proven it is possible to open up key spending decisions to a public vote, countries with larger, geographically dispersed populations or without advanced infrastructure and access to technology may face higher barriers to implement such a system.
There are also challenges in determining where to draw the line and how to overcome regional rivalries. For local councils and city administrations, there is also the concern that few have the time, the training or the inclination to really engage on anything other than fundamental issues.
Governments should investigate the potential benefits offered by the changing transparency landscape. Opening up tax revenue and spending information to engage the public in the budget process can deliver some valuable advantages, not least in enabling better targeting of revenue spend.
There are clearly significant practicalities that would have to be addressed, but the progress that has already been made in countries where a more open approach to revenue and budget spending is happening makes a case for additional transparency on the part of governments going forward.
Key action points
- Consider the advantages of disclosing tax receipts and spending for building public trust as demonstrated, for example, by the IBP’s Open Budget Index
- Study other government models for increasing transparency and consider which elements might be effective in your country
- Understand that greater openness brings its own challenges, too, and anticipate them
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