The UK has been a global leader in tax and international development under a variety of governments. After the general election on the 4 July, it will be critical for the incoming administration to continue this consensus.
From council taxes to VAT on private school fees, the past few weeks of electoral campaigning in the UK have highlighted the divisions around taxation in British politics. These are both deep and meaningful – and can generate the impression that there is not much consensus on taxation across the UK’s political landscape. However, this picture changes when we look abroad.
The main parties have been sceptical of a need to substantially increase the tax take domestically, but Labour and Conservatives have led governments that have been central in providing leadership, collaboration and funding for building stronger and more equitable tax administrations in lower income countries around the world. Maintaining this role as a strong partner in tax and development will require a renewed effort by the new administration – but also provides huge opportunities.
Enter the Tax Era?
The UK raises more than 35 percent of its gross domestic product (GDP) in taxes. While there are partisan differences around specific tax policies, there is a wide recognition that a substantial tax take is required to build strong states and public services. The UK is relatively close to the average OECD country in that regard. At the same time, low-income countries, on average, raise taxes worth less than 15 percent of their GDP. This means that – in proportion to their economy – they often operate on less than half the budget of higher income countries. In some countries, including Pakistan and Ethiopia, it’s closer to a third. A low tax take substantially limits states’ ability to provide public services to their populations and to strategically invest in infrastructure or climate adaptation, limiting policy autonomy and increasing aid-dependency.
But there is good news: across the past three decades, average tax takes in lower-income countries have increased. While aid made up a larger share of these countries budgets in the late 1990s, on average, tax has now surpassed it. While there are debates to be had on the exact mix of tax policies implemented over the period, these increases are certainly welcome.
The UK as a global partner in building stronger tax administrations
Notably, the UK has played an active role in supporting tax authorities in lower-income countries to domestically raise tax revenues. This has included technical collaborations with HMRC, supporting international fellowships in revenue authorities, and funding research, teaching and learning on tax and development. The UK has also been one of the largest donors to the Addis Tax Initiative (emerging from the third International Conference on Financing for Development in 2015), having disbursed over USD40 million since 2015 in support of domestic revenue mobilisation.
The UK’s partnership with the Rwanda Revenue Authority provides a good example of this. The UK has been working with the RRA for almost three decades now, a time in which Rwanda’s tax revenue increased substantially, and its tax to GDP ratio almost doubled, making it one of the success cases in East Africa. In recent years, the International Centre for Tax and Development (ICTD), hosted at IDS, with funding from the FCDO, has closely collaborated with the RRA on conducting policy-relevant research on tax compliance, registration campaigns and digitisation.
Building tax capacity has never been more important
Despite these achievements, progress has not been universal. In recent years, subsequent crises, including the Covid-19 pandemic, have slowed the growth of tax takes in lower income countries. In some contexts, they have fallen, and even the best performers have struggled. And yet, building stronger and more equitable tax systems in lower-income countries has never been more important.
Without stronger tax systems, achieving the sustainable development goals and climate adaptation is close to impossible. Both have huge financing needs. At the same time, high debt servicing costs are increasingly squeezing budgets, public satisfaction with service delivery is often low, and inequalities high. An additional challenge lies in increase tax revenues in a way that does not put further burdens on the world’s poor. The stakes are substantial.
Maintaining the UK’s Role in Tax and Development
Many of the ways in which the UK has historically engaged on this issue are well-suited to support lower-income countries in this situation. Building on them, the new government can expand the UK’s role in tax and development: building lasting partnerships and supporting strong and fiscally independent states. We highlight three recommendations for how this could be achieved during the coming parliamentary term:
1. Maintain a strong commitment to Official Development Aid
While building stronger tax systems can reduce aid dependence, it is imperative that tax and aid are not treated as alternatives to each other. Supporting lower-income countries in building stronger tax systems is an excellent use of development aid – but it is not a short-term fix. One of the key lessons of the UK’s engagement in this area has been the importance of incremental change – in tax and development, short-termism can cause more harm than good. Aid will continue to play an essential role in supporting development financing and climate adaptation – and in navigating expanding sovereign debt crises. A strong aid commitment is essential to strengthening UK partners’ tax capacity as well.
2. Build on what works
UK engagement in tax and development has been strongest when it has been embedded in long-standing engagements with partners that recognise the practical challenges of building stronger tax system in lower-income countries. This has included funding research that is focused on these countries’ contexts, to build a strong evidence base for new reforms, as well as efforts to communicate it effectively to policymakers. These also are long-term efforts, as seeing “what works” requires both careful design of policies and monitoring of their impact, which can take a few years to fully assess.
3. Keep a focus on equity
How tax is raised is as important as how much is collected in determining the contribution of tax systems to building stronger and more accountable states. Some of the key challenges of raising revenues in the context of overlapping crises is to do so in a way that is in line with citizen’s expectations of accountability and fairness, that shifts burdens onto those who can carry them, and does not levy new taxes on the world’s poorest groups. Keeping a focus on equity means supporting lower-income countries in making the most of digitisation opportunities, finding new ways to tax high income individuals, review the effectiveness of tax exemptions and tax incentives, improve the capacity to tax multinationals, and review current attempts to tax informal economies and the effects of current policies on gender inequalities.
While tax issues may remain contentious at home, actions on these priorities allow the next UK administration to build on a broad consensus in policy and practice, expanding its leadership role in a key area of international development, while strengthening both partnerships – and partners.
The views expressed in this opinion piece are those of the author and do not necessarily reflect the views or policies of ICTD.
