Exploring the Feasibility of Medium-Term Revenue Strategies in Developing Countries

Many developing countries are pursuing domestic revenue mobilization (DRM) initiatives, which is critical for them to finance the spending necessary to enable sustainable development. The need for DRM has now taken on greater urgency given the fiscal implications of the COVID-19 crisis. To assist developing countries to enhance their DRM efforts, the Platform for Collaboration on Tax (PCT)—a joint initiative between the IMF, OECD, the UN and the World Bank Group—proposed the concept of a Medium-Term Revenue Strategy (MTRS). The MTRS was launched in 2016 with the intention of providing a comprehensive strategy for increasing tax revenues over the medium term, and aligning tax policy, revenue administration, and legal reforms around a coherent plan embraced by all of government as well as other stakeholders. In a new CGD paper, Peter Mullins reviews the experience so far with the MTRS and finds that, while country take-up of the MTRS has been disappointing, it is worth pursuing for now as a strategy for DRM.

In this blog post, we identify actions that developing countries and capacity development (CD) partners can take to advance the development and implementation of an MTRS. However, a fundamental revisit of the concept may be necessary if the take-up rate and implementation of revenue strategies in developing countries remains low, despite the urgency of reforms created by COVID-19-induced revenue gaps.

What is an MTRS and which countries have formulated one?

An MTRS has four independent components:

1. setting a revenue target over the next four to six years, necessary to fund the spending required to support economic and social development;

2. formulating a high-level road map of tax system reform over the medium term covering tax policy, revenue administration, and the legal framework (usually in the form of an MTRS Document);

3. obtaining sustained medium-term government commitment to reform; and

4. securing adequate resourcing and coordinated support (both domestic and external) for effective implementation.

The original aim of the PCT was for three to five MTRS by July 2017. By 2019 around 20 countries were working with CD partners discussing, designing, or implementing an MTRS. While the interest of these countries is encouraging, it is disappointing that to date only seven have commenced development of an MTRS and only two have formally adopted one. Published MTRS are only available for three countries: Papua New Guinea released its Medium Term Revenue Strategy 2018-2022 in November 2017 as part of the 2018 Budget process; Uganda publicly released its Domestic Revenue Mobilisation Strategy 2019/20-2023/24 in February 2020; and Indonesia allowed publication of its MTRS but has not formally adopted it.

Why has progress been slow?

While governments are interested in the concept of an MTRS, experience from the past four years shows that it is difficult to actually develop and implement one for four reasons:

First, governments are reluctant to commit to a major tax reform. Without strong leadership, supported by the political will of the government, it is difficult to develop an MTRS and achieve progress on tax reforms. It is essential that the CD partners do not drive the process.

Second, the lack of good oversight and coordination arrangements by senior government officials can slow development and implementation of an MTRS.

Third, the tensions between tax policymakers and tax administrators about the direction of reforms can also hinder progress.

Finally, implementation of an MTRS may be slowed due to a lack of specificity regarding some policy reforms, so that making the actual detailed changes may be politically challenging. An example would be a policy calling for a reduction in tax exemptions but without specifying which exemptions should be targeted.

Despite these concerns, the experience of countries that have developed an MTRS show that it has the potential to provide developing countries with a DRM strategy that can be adapted to meet each country’s circumstances. The revenue targets set by countries with an MTRS are likely to be overambitious—Uganda seeks to increase tax-to-GDP by at least 0.5 percentage points a year over the next five years, PNG aims to halt its declining revenue- to-GDP trend and increase revenues to at least 14.0 percent of GDP by 2022, and Indonesia has targeted increasing tax-to-GDP by 5 percentage points over five years. While ambitious, these targets suggest that developing country governments recognize that there is potential to increase revenues over the medium term. A government may be more likely to make  progress on an MTRS if it is already seriously considering major tax reform, or has initiated some tax reforms (policy, administration, or legislative). An MTRS provides an opportunity to consolidate these reforms, assess their progress, and potentially reinvigorate them, and to ensure a more coordinated direction.

A possible way forward

The experience so far provides guidance on actions developing countries and CD partners can take to advance the development and implementation of an MTRS. We highlight eight critical points:

• Developing countries should take the lead in initiating and building an MTRS and identify a strong senior leader or leaders to champion the reform, preferably the minister of finance and/or the secretary of finance.

• Governments should have the political will to support the development and implementation of the MTRS, with senior government officials consulting and communicating with business, civil society, and the broader public, explaining the benefits of the reforms. Supporting this leadership should be a high-level steering committee to coordinate across government, especially with the revenue agencies, and with CD partners.

• At the commencement of the MTRS process, the government should establish a clear timeframe for developing an MTRS, finalizing the MTRS document, and making it public.

• The revenue targets in the MTRS should be realistic, as should be the expectations of the reforms. Even advanced economies that set out tax reform agendas usually fail to fully implement all of the reforms.

• Those developing countries that are undertaking, or have recently undertaken, tax reform efforts should use the MTRS as an opportunity to consolidate these efforts.

• Governments should focus on meeting the four components of an MTRS, rather than on any specific design, providing greater sense of ownership of the MTRS document.

• Countries should plan ahead for an MTRS by enhancing their revenue data gathering capability, and by using the tax system assessment and diagnostic tools.

• Finally, governments should engage CD partners early in the process, and provide a clear government-led mechanism for coordination of CD partners. Apart from providing technical assistance, CD partners can support the MTRS process by encouraging the government to take the lead in initiating and developing an MTRS. They can assist the government in developing a realistic timeframe for formulating an MTRS as well as about the revenue targets. In the development and implementation of an MTRS, CD partners should ensure they have adequate supervision of advisors, and the advisors are aware of the CD partners’ coordination efforts. CD partners should not be too demanding about the design of an MTRS, as long as it meets the four components of an MTRS.

The bottom line is that if the above-noted actions are unable to reinvigorate the concept of MTRS, it would be time to redesign it and consider alternative options.