Poverty Reduction

Achieving the MDGs requires a significant increase in resources, or ‘scaling up’, to finance increased investment - Most policy research and advice on fiscal reform in the 1990s placed a strong emphasis on short-term macroeconomic stability and fiscal solvency objectives (maintaining low inflation and a manageable level of debt) that limited public spending. More recently it has favored increased efficiency in tax collection and administration and higher levels of foreign aid to finance incremental public spending. UNDP advocates that in most countries these options are not enough to finance the appropriate public investments needed for long-term developmental returns. Domestic resources must also be mobilized through taxation and domestic borrowing where appropriate.

Taxation - The international financial institutions (IFIs) advocate a fiscal reform strategy for developing countries based on trade liberalization and the implementation of broad-based taxes on domestic activities, such as income and consumption taxes, especially value-added tax (VAT). However evidence has found that the VAT may be regressive rather than ‘revenue neutral’, as taxing all consumption makes it relatively more expensive for the poor. It is therefore important to analyze the fiscal impact of the VAT especially the degree of tax incidence or degree of regressive-ness. It is also crucial that countries identify and analyze alternatives to the VAT.

Domestic Borrowing - Domestic Borrowing (DB) may present a possible source of resource mobilization, allowing savings to be realized for productive investment, although it is often prohibited by strict and ill-designed conditionalities. As domestic borrowing involves a transfer from the domestic private sector to the domestic public sector, it does not directly increase a country’s liabilities to the rest of the world. It can also increase the propensity to save to the extent that such borrowing reduces domestic consumption. It can, however, crowd out private investment and have negative distributional implications, depending on the country context, the fiscal situation and how the borrowing is done. Therefore it is important to assess the net benefits of domestic borrowing in determining its optimal magnitude.

Capacity Development. Public Financial Management Reform is a necessary precondition for effective budget management. However it does not represent a sufficient platform to align budgets with development objectives, including the MDGs. UNDP stresses the need to develop governments’ capacity to analyze fiscal policy options and trade-offs. UNDP is centrally involved in fiscal policy capacity building in China and Nigeria.