The pandemic’s impact on government budgets calls for renewed commitment to the SDGs
By Hyun H. Son, Véronique Salze-Lozac’h
COVID-19 has brought unprecedented economic and development challenges but it also offers opportunities for financing solutions to help achieve the Sustainable Development Goals.
As countries continue to battle COVID-19, massive fiscal stimulus packages have helped save lives and protect livelihoods in many economies. However, they have come with a hefty price tag, with the world’s general government debt projected to reach nearly 100% of the global gross domestic product (GDP) in 2020.
The fiscal policies that provided essential support in the short-term may have implications for countries’ long-term recovery including their ability to finance the Sustainable Development Goals (SDGs). Generating both public and private investments will be therefore crucial in financing the SDGs and delivering development results.
Countries around the world are piling on record levels of debt as COVID-19-related costs increased global debt by $19.5 trillion in 2020, the Institute of International Finance estimates. More borrowing is foreseen as countries scramble to finance their COVID-19 vaccination programs as well as their social protection initiatives amid prolonged lockdowns in certain countries.
While many are calling for a greener and more sustainable recovery, the COVID-19 pandemic’s strain in the balance sheets of governments translates into countries’ reduced capacity to respond to the pandemic and invest in the SDGs to promote this recovery. Projections by the International Monetary Fund show that general government debt of advanced countries will far exceed the size of their economies at 125.5% of their GDP in 2020.
General government debt is expected to reach 63.7% of the GDP of emerging market and middle-income countries in Asia in 2020. As public debt soars, the SDG financing gap in developing countries worldwide has increased by $1.7 trillion in 2020 due to the pandemic, according to the Organisation for Economic Co-operation and Development (OECD). The estimated $1.7 trillion shortfall for 2020 adds to an existing gap of $2.5 trillion in annual financing to achieve the SDGs by 2030 based on OECD estimates.
Record borrowing by governments across the world is anticipated to result in financial challenges. In particular, pre-pandemic donor financing levels may not be available to developing countries. Furthermore, developing countries will soon start needing financing for their debt payments including those incurred at the height of the pandemic in 2020.
Against this backdrop, a new report by the Asian Development Bank’s (ADB) Independent Evaluation Department (IED) highlights the importance of mobilizing both public and private resources in financing the SDGs, which provide the framework for socio-economic recovery from COVID-19 and long-term development.
The public and private sectors can work together in bridging the SDG financing gap and ensuring that public and private investments are aligned with the SDGs. Mobilizing public and private financing will require promoting progressive tax systems and improving tax administration especially in the digitization of many economies while balancing the need for private sector growth.
The socio-economic impacts of the COVID-19 pandemic is disproportionately affecting the poor and vulnerable and has already highlighted the need for stronger social safety networks. With such uneven impacts, the pandemic has strengthened the case for progressive tax systems—that is, tax liability proportionally increases with income and wealth.
The COVID-19 pandemic will have lasting impacts on the economic and development landscapes of countries worldwide as well as on the achievement of the SDGs.
Progressive taxation would help to increase revenues while reducing income inequality and improving economic mobility.
In a study comparing tax progressivity in 32 developed countries, how progressive a tax system is determines the magnitude of its contributions to social welfare gain. In Australia, every dollar of average tax collected contributes a social welfare gain of 22 cents.
Data from OECD shows that Australia has one of the most progressive tax systems among developed countries. In the Republic of Korea, the tax system results in a social welfare gain of 9 cents for every dollar collected. While the level of contribution also depends on other factors, including budgetary choices, progressive taxation can indeed help level the playing field especially during these pandemic times–narrowing the gap between the advantaged and disadvantaged populations.
On the public sector side, a shift in the mobilization of resources will also require serious efforts to transform the tax administration systems including through the use of new technologies. The pandemic is accelerating the digital transformation of economies around the world. The lockdowns and mobility restrictions imposed by the COVID-19 pandemic underscore the need to strengthen tax administration systems through their digitalization.
A survey of the 32 member administrations of the Forum on Tax Administration by OECD found that around 75% seek to continue transitioning field audit work through digital environments. The digitalization of tax administration systems would require establishing or upgrading information technology (IT) infrastructure. About 25% of the surveyed OECD tax administrations reported outages in their IT systems relating to services used by taxpayers to transact with these administrations such as taxpayer portals or electronic forms.
On the private sector side, the IED study points to the crucial role it can play in financing the SDGs. The most common priority SDG goals for the private sector are SDGs 13 (climate action), 12 (responsible consumption and production), and 8 (decent work and economic growth), according to a survey of 250 companies in 43 countries by the World Business Council for Sustainable Development & DNV GL.
The COVID-19 pandemic will have lasting impacts on the economic and development landscapes of countries worldwide as well as on the achievement of the SDGs. While the pandemic may bring forth unprecedented economic and development challenges, it also offers opportunities for transformative interventions and financing solutions from both the public and private sectors to help achieve the SDGs even in the most challenging of circumstances.