Tax and public finance – sustainable financing of welfare services and development goals

Published 8/8/2024

Updated 8/8/2024

Taxes and other government revenues are becoming increasingly important for the funding of the sustainable development goals (SDGs). In addition to increased revenues, more transparent and effective tax systems contribute to the accountability of the authorities and better use of public funds – a so-called “governance dividend”. Shortcomings in capacity, financing and regulations for public administration are major causes of weak economic development and financing of the SDGs. Improved revenue and revenue management are also important when it comes to stabilisation and state-building in countries that are experiencing fragile situations.

What

Norwegian aid helps increase tax revenue and strengthen the management of public funds in developing countries, including through professional cooperation to strengthen public institutions’ expertise and capacity to mobilise and manage resources to promote sustainable development.

Increased revenue can be the result of both tax reforms and improvements within the tax administration, as well as the result of measures to reduce tax avoidance or other illicit flows of capital – often referred to as illicit financial flows (IFFs).

Why

According to the “Financing for Sustainable Development Report 2024”, the financing gap to achieve the SDGs increased dramatically during COVID-19, while economic inequality increased in most countries. The expectations from the Financing for Development Conference in 2015 for the sustainable development goals to be achieved through private mechanisms of financing were found to be based on weak assumptions with regard to which investments in poor countries could realistically yield returns on capital. Increased interest rates also expose the limitations associated with being too dependent on debt financing. Towards 2030, it is clear that public sources of financing, especially tax revenue, must carry a significant share of investments in public goods in order to achieve the sustainable development goals. Tax is also a key to increased redistribution, which is necessary in order to achieve SDG 10 relating to inequality.

Tax-related development cooperation constitutes a highly effective channel for supporting countries to increase public resources. Several projects funded by Norway have seen direct results in the form of markedly increased tax revenues. Support for strengthened tax systems and improved systems for managing public finances so that the funding benefits residents in the form of services can therefore be important contributions in increasing the opportunity for public investments to achieve the sustainable development goals in developing countries.

How

There are a number of obstacles to increasing tax revenues in developing countries, such as large informal sectors, major inequalities when it comes to opportunities, income and wealth and between genders in the population, weak capacity on the part of tax administrations and international tax rules that are inadequate for the needs of developing countries. Political and administrative systems for the management of public funds are often fraught with significant shortcomings.

Norway supports developing countries in managing such challenges, by strengthening tax systems and the administration of public finances in developing countries. This is done through contributions to multilateral organisations such as the OECD, the UN, the IMF and the World Bank, civil society organisations, research and direct cooperation between Norwegian institutions such as the Norwegian Tax Administration and Statistics Norway, and their sister organisations abroad. Many African countries posess vast natural resources, and several Norad partners contribute to improving taxation and the use of revenue from the extraction sector.

Support from international experts to conduct specialist tax audits, especially in relation to multinational enterprises, often leads to tangible and measurable results. Technical assistance from international experts can provide substantial revenue boosts in the short-term, while establishing working methods and strengthening expertise that will lead to tax gains over time. However, Norad assumes that supporting more fundamental reforms to tax administrations, such as digitalisation processes and contribute to civil society organisations, journalists and others being able to hold the authorities accountable and ensure more open and fair tax systems, will yield important long term results. Some of the stakeholders supported by Norwegian aid include the journalists’ network ICIJ, which was central in uncovering financial secrecy and misuse of tax havens, including through the Panama Papers revelations.

Who/Where

Norway supports actions and reforms on a global, regional and national level via professional cooperation on tax and illicit financial flows, strengthening research and knowledge and transparency efforts through civil society organisations, as well as support for journalists’ organisations.

The professional cooperation takes place through large multilateral institutions such as the IMF, World Bank, UN and OECD and bilateral cooperation through the knowledge bank – an institutional cooperation between specialist Norwegian communities and partners in the authorities in cooperating countries. The Norwegian Tax Administration has, among other things, bilateral cooperation in place with sister organisations in Rwanda, Tanzania, Zanzibar and Kenya, while Statistics Norway has a presence in Ghana and Kenya. Norad also provides assistance to the authorities in Mozambique to manage revenue from natural gas.

Tax and public finance – sustainable financing of welfare services and development goals

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