Digital Revolutions in Public Finance

INTERNATIONAL MONETARY FUND

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2017
• eBook ISBN: 9781484315224

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Chapter 1. Introduction Reshaping Public Finance

Sanjeev Gupta, Michael Keen, Alpa Shah, and Geneviéve Verdier

The effectiveness of fiscal policy—the collection and use of resources to stabilize the economic cycle, pursue distributional objectives, and enable public spending—depends crucially on the information and technologies available to government, and how it exploits them. Governments stimulate the economy during recessions and retrench during booms. They tax in order to finance social safety nets, health and education services, infrastructure, and so on. The design and implementation of fiscal policy is therefore fundamentally shaped by the reliability, timeliness, and detail of the information available to the government about the economy and its actors. This includes taxpayers’ incomes and assets, the identity and circumstances of social program beneficiaries, the employment status of workers, the size of the output gap, and the magnitude and timing of government transactions. By transforming the way in which governments can collect, process, and act on information, digitalization¹ is reshaping the formulation and implementation of these policies—a process that has only just begun. This reshaping is the topic of this book.

Computerization—the use of computers to perform human tasks—has become as familiar and routine in government as anywhere else. But now it is yielding to the inherently more profound process of digitalization. And deep-learning technologies are pushing the boundaries of digitalization one step further, with artificial intelligence machines now able to learn by themselves based on information fed to them. Using such technology, computers are now capable of designing industrial objects, generating scientific hypotheses, and even composing music (McAfee and Brynjolfsson 2017).

Digitalization has also vastly increased the possibilities for data collection and storage. In 2000 only 25 percent of data were stored digitally; by 2007 this metric had risen to 94 percent (Ross 2016). With multiple means to access and share information—computers, tablets, phones—this revolution has left virtually no corner of the world untouched: in 2014, 90 percent of the worlds population had access to a mobile phone (ITU 2014; GSMA 2013). This digital revolution is having a wide-reaching impact, presenting markets, society, and governments with the challenges of responding to and absorbing this continual change.

This chapter first argues that while the digital revolution offers exciting new opportunities for public finance (better information, systems, and policy)—which are the focus of the next section—it is not without significant challenges and limitations. These are taken up in the second section. The third section discusses how countries will need to take steps based on their own circumstances, and highlights the need for them to cooperate in tackling emerging challenges. The remainder of the chapter details the contributions of the book.

New Opportunities

Through digitalization, government can potentially conduct current fiscal policy more effectively—doing what we do now, but better—and perhaps before too long, design policy in new ways—doing things, that is, that we do not, and cannot, do now. They can have better information, build better systems, and design and implement better policies.

Better Information

Of the digital revolutions many potential benefits, the most visible and crucial may well be the ability to collect, process, and disseminate more timely, easily accessible, and transparent information on economic activity. Greater storage capacity and computing power means that governments can now collect more information, by tracking and recording a vast range and volume of transactions and interactions.

Tax authorities are increasingly gaining access to the vast amount of information held by the private sector—such as data on bank transactions and interest income—through the use of digital systems, standardized reporting formats, and electronic interfaces. Systems for sharing information have also improved. The increasing trend toward single-view online portals or digital platforms allows fiscal authorities access to data across government departments. New norms in global tax transparency have led to the development of a global reporting standard on automatic exchange of information on the financial records of nonresidents with the tax authorities in their country of residence.

Governments can now collect more timely information. Tax authorities in Australia and the United Kingdom are now receiving real-time reporting of payroll information, and, in Brazil and Russia, electronic invoicing systems allow immediate access to data on firm sales. With the automation of public finance management, a number of governments can now access high-frequency fiscal data through their information technology systems. Some countries—such as Brazil and the United States—even make these daily cash operations available to the public.

Digitalization also allows for more precise identification of individuals and their associated activities. New technology to monitor and record biometric characteristics provides a unique, secure, and less-costly alternative to more traditional paper-based official documentation systems. In many developing countries, this technology has given governments and citizens the means to authenticate official identity, strengthening civil registries and national ID card systems using various physical traits, including fingerprints, iris scans, vein patterns, and DNA. Gelb and Clark (2013) find projects to biometrically identify people—small and large, by governments and by nongovernment organizations—in more than 80 countries. Latin America leads the way in biometric-enabled national identity systems, but other regions are not far behind. Africa, Angola, Ghana, Nigeria, and South Africa have established or are planning such systems. Countries in South Asia such as Afghanistan, Bangladesh, Nepal, and Pakistan are following suit. India’s Aadhaar is the world’s largest biometric identification system, with more than 1.1 billion citizens registered.

In the private sector, the constant recording of digital information in real time has given rise to a data economy, with individuals leaving a digital trail with every internet search, retail transaction, and activity that is carried out using digital means. Businesses are already buying and selling these data, and using them in conjunction with artificial intelligence algorithms to better target their advertising efforts. Governments are already starting to catch on, and such big data and cognitive computing may also expand policy and enforcement options.

Better Systems

With new information and new capabilities, a wide range of new possibilities emerge for enhanced implementation of tax and spending policies. These include lower costs of tax collection and compliance, as well as of delivering public services, administering social programs, and managing public finances.

Tax Administration

Electronic filing of tax returns has reduced the cost of compliance for taxpayers and of administration for the government. Many countries began experimenting with electronic filing of tax returns, for example, as early as 10 to 15 years ago (OECD 2006; Deloitte 2013). Furthermore, access to third-party information has allowed governments increasingly to “prepopulate” tax returns, easing the compliance burden even further, with taxpayers simply having to verify the information they are presented with. And access to additional information sources and capabilities to link existing information in various government systems is helping tax authorities to better detect evasion or avoidance.

Digitalization has allowed governments to implement electronic tracking of business activity. For example, tracking of sales through the use of e-invoices has facilitated more efficient administration of indirect taxes, a common area of fraud and revenue leakage. Russia has seen the rollout of online cash registers that record information on each transaction, which is then transferred immediately to a server where tax authorities can access it. For decades, massive cross-checking of value-added tax (VAT) invoices (to verify that sellers have been charged the tax for which they seek a credit) was presumed to be technically impossible; now China is showing that it can be done.² In Brazil, the Public System of Digital Bookkeeping or SPED system allows tax authorities to determine a company’s income tax obligation based on information the business enters into an annual digital bookkeeping report.

With data being collected in more standardized formats, increased processing capabilities have allowed tax authorities to assess taxpayer risks by analyzing large data sets and by combining different sources of data (for example, firm-level input and output data for VAT purposes). In the United Kingdom, HM Revenue and Customs’ Connect computer draws on information from a wide range of government and corporate sources, as well as individual digital footprints, to create a profile of each taxpayer’s total income. Such analytical capability could even be used to assess the behavioral impact of new tax and spending policies.

Digital systems present new roles for consumers and third parties in facilitating enhanced compliance. The emerging peer-to-peer (P2P) economy, in which a digital platform intermediates transactions between individual buyers and sellers, has introduced organization and formalization to previously informal and perhaps undocumented activities. Such platforms record large volumes of consumption and income data that, if accessible by tax authorities, could play an important role in tax administration (as discussed in Chapter 3 by Aslam and Shah). Estonia, for instance, uses the platform technology to connect Uber drivers directly with the tax office, adding income from rides directly to their tax return. Offering a role for consumers as auditors, the Nota Fiscal Paulista program in Sâo Paulo, Brazil, using a digital payments system, is designed to encourage better enforcement of the VAT at the final consumer stage by providing a 30 percent tax rebate and monthly lottery prizes to consumers who ask for receipts.³

Public Spending, Service Delivery, and Administration

Digitalization can help improve public service delivery. First, governments can take advantage of greater capabilities to disseminate important information. Studies have found that sharing information through text messaging about best agricultural practices and commodity prices can improve farmer knowledge. Similarly, information about breastfeeding and sexual and reproductive health shared through mobile phones has increased recipients’ knowledge (see Chapter 8 by Aker). Estonia stands out in its use of digital platforms for delivering government services. Using an electronic identity card, citizens can vote online and consult medical records—just a few of the 600 e-services that the government offers (see Chapter 12 by Cangiano, Gelb, and Goodwin-Groen). Digital technology can also help improve the quality of services. Results from impact evaluations in Haiti, India, Pakistan, and Uganda suggest that digital monitoring can reduce the pervasive absenteeism of some key public service workers, including nurses, doctors, and teachers (World Bank 2016).

The use of electronic payment systems has helped cut bureaucratic inefficiencies, produce fiscal savings, and facilitated the delivery of benefits (see Chapters 8, 11, and 12 by Aker; Roy and Rai; and Cangiano, Gelb, and Goodwin-Groen, respectively). In Haiti and the Philippines, for instance, the cost per transaction of some social assistance programs fell by close to or more than 50 percent per transaction once payments had been digitalized (Zimmerman, Bohling, and Rotman Parker 2014). Governments are now extensively using biometric technology to expand coverage of social benefits and improve targeting. Launched in 2013, the Indian governments Direct Benefit Transfer program significantly changed the delivery system of subsidy and welfare benefits by transferring payments directly into bank accounts linked to beneficiaries’ Aadhaar biometric ID (see Chapter 11 by Roy and Rai and Chapter 12 by Cangiano, Gelb, and Goodwin-Groen).

At the same time, digitalization of government payments has often reduced fraud and corruption (see Chapter 13 by Lund, White, and Lamb). In Sierra Leone, the introduction of e-payments through mobile wallets during the Ebola crisis restored payments to health care workers whose salaries had often been stolen (Bangura 2016). In Côte d’Ivoire, most secondary school students pay their school fees digitally, virtually eliminating the high levels of theft and bribery that were commonplace after the country’s civil war (Frydrych, Scharwatt, and Vonthron 2015).

A world in which databases are linked across government agencies and relevant third parties offers opportunities to expand benefit coverage. Attempts to fight poverty through redistribution are often thwarted by the failure of many eligible citizens to register for benefits. Non-take-up rates can be high: a 2016 study for the French National Assembly estimated that one-third of eligible citizens failed to take up guaranteed minimum income benefits (prior to its 2016 reform).⁴ The non-take-up rate for in-work benefits was higher, at two-thirds of eligible citizens. If information about individuals is synchronized across public agencies and employers—with digital authentication (biometric if necessary) linked to banking information—changes in individual circumst...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Acknowledgments
• Foreword
• Contributors
• 1 | Introduction: Reshaping Public Finance
• PART I | PUSHING THE FRONTIERS IN TAX POLICY AND REVENUE ADMINISTRATION
• PART II | INNOVATIONS IN FISCAL MANAGEMENT
• PART III | MODERNIZING PUBLIC SERVICE DELIVERY AND SPENDING
• PART IV | COUNTRY CASE STUDIES
• PART V | HOW MUCH IS IT ALL WORTH?
• Index
• Footnotes