I recently took part in the third high-level symposium of the UNDP’s Finance, Integrity and Governance Initiative with experts and negotiators involved in the Financing for Development (FfD4) process. The symposium focused on domestic resource mobilisation (DRM), the primary source of development financing. While the conversations were held under the Chatham House Rule, a report will be published, and I’d like to share three personal reflections here, ahead of the Forum on Financing for Development that will be held next week in New York.
Doubling aid for DRM is a credible commitment – and can help restore trust
The backdrop to the symposium, and indeed the entire FfD4 process, is a string of dramatic setbacks in international development. According to new data from the OECD, official development assistance (ODA) from DAC member countries fell by 7.1% in real terms in 2024 compared to 2023. With additional deep cuts to aid made by donor countries in the last few months, trust in the international system’s ability to deliver on development is being eroded.
The first draft of the FfD4 outcome document reiterates the 0.7% GNI target for ODA, but this goal has long been out of reach for most countries, and now looks more distant than ever. In contrast, the commitment to double support for DRM and public financial management (PFM) by 2030—requested by lower-income countries and included in the draft outcome—offers a real opportunity to show commitment to equitable partnerships, invest in resilience, and demonstrate goodwill.
Crucially, this is a commitment that can be delivered on. Currently, a minuscule 0.2% of all ODA is allocated to assistance on DRM. In 2021, the amount was $574.4 million. Even with declining aid budgets, doubling support to DRM in real terms to reach a billion by 2030 is entirely doable. It also presents a powerful opportunity to start restoring trust in the international aid system.
There are many proven options for investing scaled-up funding for taxation
Over the last decade, lower-income countries have made remarkable progress in strengthening their tax systems. These advances are grounded in strong national commitment and ownership. Digitalisation, for example, has transformed tax processes, benefiting both governments and citizens: digital IDs have boosted taxpayer registration in Ghana and Uganda; digital payments have reduced tax compliance costs in Tajikistan and Uganda; and digitised data has supported more effective tax enforcement in Rwanda and Ethiopia. Innovative approaches to taxing the wealthy have also been implemented with success, including establishing High-Net-Worth Individual Units and using withholding taxes, as seen in Uganda and Nigeria.
At the same time, the rise of digitised administrative tax data has enabled more rigorous research and policy analysis. With more context-specific evidence on what works and what doesn’t, policymakers can better redirect scarce resources towards high-return, equitable policies, and away from ineffective ones. For instance, in Rwanda, the tax authority deregistered thousands of taxpayers after research showed that the costs of maintaining them far outweighed the revenue collected.
The first draft of the FfD4 outcome document lays the foundation for expanding these efforts. It highlights digitalisation, equitable taxation and improved taxation of wealthy individuals, gender-responsive tax systems, and greater transparency through measures like beneficial ownership registries. The past decade has shown that investment in these areas has the potential to increase revenue and equity. If the commitment to double aid for tax is upheld, there is no shortage of impactful, evidence-backed investments to make.
Boosting basic administrative capacity is key to unlocking tax potential
Despite significant strides, some DRM initiatives have either failed or yielded benefits well below their potential. For example, digitalisation boosted registrations in Ghana and Uganda, but failed to deliver more revenue, while measures to tax the wealthy have proven difficult to sustain over time. These challenges can be traced back to one simple thing: a general lack of raw capacity for basic administrative functions within tax administrations.
Digitised data needs to be integrated into core administrative functions like audit and risk management, which in turn requires tax officials with the right skills to analyse that data systematically. Similarly, taxing the wealthy can only be effectively sustained if initiatives like setting up HNWI units are backed up by officials who understand wealthy individuals’ complex economic affairs and can follow up on their compliance over time.
Today, the average tax official in a low-income country deals with ten times as many taxpayers as their counterpart in a typical high-income country. Without the capacity to perform basic functions effectively, many of the aspirations in the FfD4 outcome document cannot be achieved. This is why its emphasis on capacity support is so critical.
Developing countries rightly see this as the bedrock of self-reliance in a world of declining aid. Increasing tax capacity requires focusing on a rather mundane agenda including measures to increase staff numbers, ensure they have the skills to work in a digitised administration, monitor and enhance institutional performance, and investing in core functions like registration, audit, and data analytics – all of which is fully achievable with better financing.
Doubling support for tax and PFM systems is the most sustainable strategy
Virtually everything required for inclusive growth and improved living standards, from infrastructure to social protection, requires additional resources. Tax revenue already far outstrips aid as the main source of development financing. Though not yet sufficient on its own, it is the only viable strategy to generate increased and sustained financing for development in the long-term.
With ODA in decline, it is now more important than ever to invest at least a portion of what remains of aid budgets in high- impact activities that empower recipient countries to fund their own priorities and lay the foundation for self-reliance in the longer term. Doubling aid for tax and PFM by 2030, with a strong focus on strengthening the capacities required, is exactly where global ambition needs to be. It is a credible, cost-effective commitment with transformative potential to build trust, strengthen relationships between citizens and their governments, and generate the necessary revenues to drive inclusive growth and deliver on development priorities.
This opinion blog was first published by the International Centre for Tax and Development (ICTD), based at IDS.
