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Background Transparent public finance as the basis for sustainable development
A functioning public finance system generates revenue for the state, allows the funds to be used responsibly to benefit the population, and creates an enabling environment for private sector activity. It covers tax policy and tax administration, budget systems, the award of public contracts, financial controlling and debt management.
Transparent, legally sound and development-oriented public financial management is fundamental to successful long-term development. It requires effective, accountable public financial administration, functional supreme audit institutions, and politically and socially established control mechanisms.
Germany promotes these principles of good governance in the area of public finance, thereby also increasing countries’ crisis resilience.
The COVID-19 pandemic hit many partner countries when they were already in a precarious financial position, with high levels of debt and low foreign exchange reserves. Global energy and food prices also rose as a result of Russia’s war of aggression against Ukraine, which led many governments to take fiscal countermeasures. The fiscal space will therefore remain limited for many countries in the near future.
Good financial governance helps partner countries to mobilise urgently needed domestic revenue, and to use limited funds more efficiently and in a way that contributes more effectively to development.
Mobilising domestic revenue
The importance of state revenue for sustainable development was highlighted at the UN conferences on financing for development (Monterrey in 2022, Doha in 2008 and Addis Ababa in 2015). The aim of the Addis Tax Initiative is to enhance cooperation in the area of public finance and support developing countries in advancing their tax and customs systems. The topic was also a focus at the Fora on Aid Effectiveness (Paris in 2005, Accra in 2008, Busan in 2011).
However, in many developing countries, tax revenue is insufficient to enable governments to fulfil all their duties. This is due, among other things, to an inadequate tax base, as the majority of economic activity takes place in the informal sector. Significant amounts of revenue are also lost to tax evasion, tax avoidance and corruption. In many cases, this deficit is made up by taking out loans – which are an additional burden on the public budget.
What is more, tax evasion, tax avoidance and corruption weaken the relationship between a state and its citizens; the population loses trust in public institutions and the legitimacy of the government’s actions.
It is only by mobilising sufficient domestic revenue that developing countries can free themselves from dependency on external support in the long term and take ownership of their development goals. Germany supports its partner countries in reforming their tax systems and is actively working at an international level to combat tax evasion and avoidance.
Good financial governance and the “recover forward” process
Good financial governance can help to overcome the impact of crises more effectively, reduce fraud in cases of extensive emergency support measures, and create public finance institutions that are sustainable and crisis-proof in the long term.
In this process, good financial governance is crucial when setting the course for fiscal policy; it ensures that previous progress in reducing inequalities and poverty is maintained.
Good financial governance also creates incentives for sustainability. As part of a “recover forward” approach, it can promote a socially and environmentally sustainable recovery following crises such as the COVID-19 pandemic – one that is aligned with the 2030 Agenda and the Paris Agreement.
As at: 27/11/2023