Speech

Latin America: Building a Strong and Reliable Revenue Base, Mr. Shinohara's Opening Remarks for the Tax and Growth Seminar

November 9, 2012

As prepared for delivery

It is a great pleasure to be in Brazil, and to participate in this important gathering of policymakers from Latin America. We will discuss and share experiences on the highly relevant and difficult issue of strengthening the structure of government revenue in a manner conducive to economic growth. In my short intervention, I will touch on how the global context makes this issue particularly relevant for Latin America today.

Despite troubles elsewhere in the world, most of Latin America continues to perform quite well. This success is largely the result of the determination of policy makers to strengthen policy frameworks over the past decade. The region’s resilience has increased thanks to improved government balance sheets; lower external debt and higher international reserves; more flexible exchange rates; and stronger financial regulation and supervision. These improvements have allowed the region to withstand the severe external shocks of recent years.

However, this success should not give rise to complacency, particularly given that the global environment remains complicated, and risks and uncertainty are bound to persist for some time.

As you know well, the global recovery has been slow and uneven. Advanced economies are facing tremendous difficulties in repairing their balance sheets. The lack of decisive policy actions has weighed on global confidence, activity, and trade. Global activity is projected to slow from 3¾ percent in 2011 to about 3¼ percent this year. Meanwhile, growth in most emerging economies remains healthy, although it has moderated as well.

We project a gradual pick up in global activity in the coming years, although this hinges on more decisive and timely policy actions, particularly in the advanced world. Recent announcements by European leaders have helped calm down markets, but these must be followed by concrete implementation steps to improve confidence and ease financial conditions in the more vulnerable euro area economies. Policymakers also need to present a credible path to a stronger banking and fiscal union. In the United States, with the Presidential election behind us, a political agreement is urgently needed to prevent an unduly large fiscal contraction in 2013, with negative implications for global growth. Emerging Asia has weathered the storm relatively well, but sustaining growth over the medium term is conditional on gradually shifting domestic demand toward consumption.

In Latin America, many countries continue to benefit from the double tailwinds of easy financing conditions and high commodity prices. Recent decisions by central banks in advanced economies indicate that world interest rates would remain very low for a prolonged period of time. Meanwhile, still healthy growth in Emerging Asia suggests that commodity prices will remain at relatively high levels from a historical perspective. However, these favorable external conditions will not last forever, and could change quickly should downside risks materialize.

The region needs to take advantage of the still relatively favorable external conditions to rebuild or maintain fiscal space. It must preserve its hard-won fiscal credibility and create room for maneuver in case the dark clouds set in. In many countries public debt levels and fiscal balances are still weaker than before 2008. Some countries are particularly vulnerable to a sharp reversal in commodity prices, as they have not saved enough of the commodity windfall.

Strengthening fiscal frameworks require building stronger and more reliable revenue bases. This is necessary to help countries weather global shocks (and limit income volatility that comes with increased commodity dependence), but also sustain growth over the medium term. A stronger revenue base would provide a more stable source of income to finance much needed public investment in the region. Better designed tax structures could encourage growth while promoting equity.

This conference will provide a comprehensive overview and insights into the trends and challenges for tax policy and tax administration in the region.

The questions which the conference will address include:

• What are the main challenges to ensuring that tax systems are structured in a way that promotes growth while achieving a more equitable distribution of income?
• Does the taxation of non-renewable natural resources ensure that the gains from this sector are captured effectively, while encouraging needed investment in these vital sectors?
• What are the key considerations that policymakers should think about when designing policies to tax the financial sector?
• What is the scope for countries in the region to increase revenue from state and local government taxation from their current low levels?
• What changes should be adopted to ensure that countries benefit more from regional integration arrangements?
• Finally, what are the main challenges to ensure that tax administrations continue to improve taxpayers’ voluntary compliance while reducing tax evasion?

These are fundamental, and difficult, issues to address—issues that we hope the conference will help clarify, so that policymakers will come away with some new ideas on how to improve the structure of their tax systems and tax administration in a way that is conducive to growth and its equitable distribution across society.

Going forward, the region should build on its success to ensure stable and sustainable growth. The current juncture provides an opportunity to strengthen government revenues in a manner consistent with stable and strong growth over the medium term.