Sharpen collections before you hike, IMF boss tells tax bodies at G20 meet

Emerging economies must strengthen their capacity to collect tax revenues and improve spending efficiencies before proposing sweeping tax hikes on their taxpaying households and businesses.

These remarks were expressed at the meeting of finance ministers and central bank governors of the G20 countries in Cape Town on Wednesday. This is one of many events taking place in South Africa this year as the country took on the G20 presidency for 2025.

Attendees gathered to discuss matters including spending pressures faced by countries amid rising costs for households and businesses, tax avoidance and capacity challenges in revenue collection in emerging economies.

IMF MD Kristalina Georgieva said the event was held against the backdrop of high levels of debt and the need to mobilise effectively while making good use of resources. She said as important as collecting tax revenues was the ability to spend tax revenues effectively.

“Quality of public spending matters, not only for the wellbeing of the economy. It matters for creating public support among businesses and households for the need to contribute to the public purse. And let’s admit here that there is a lot of work to do in that area.”

Georgieva’s remarks came in the week after finance minister Enoch Godongwana could not table South Africa's 2025 budget in parliament after the government of national unity cabinet rejected his proposal to raise VAT from 15% to 17%.

This brought into focus South Africa’s fraught fiscal position, with limited options to raise revenues as well as the inability of the finance minister and tax commissioner to find common ground on support for the SA Revenue Service's (Sars) efforts to bolster collections.

At a media briefing before the now-postponed budget, Godongwana could be heard making remarks that laid bare tensions in his working relationship with Sars Commissioner Edward Kieswetter.

Georgieva said emerging economies continued to struggle with enhancing collections, with lower collection levels than those of their more developed counterparts. She said added inefficiencies in spending what was collected also hampered public support for taxes.

“On average, more than 30% of resources allocated by emerging markets to create and maintain public infrastructure and close to 40% in low-income countries are lost to inefficiencies. So, it is an important topic to keep in mind — that the public will be supportive to pay taxes if they see their money is wisely used.

“It is a tough time to be in this area of public service these days. After the huge shock of Covid-19, war inflation and the need to raise interest rates and the transformational pressures for countries. Today, the public appetite [for tax hikes] is at historical lows and yet it is paramount to acknowledge and use the significant potential in developing countries to improve that capacity, enhance revenue mobilisation and strengthen the efficiency and use of these resources.”

She said the average gap between average and potential revenues in developing economies was 7% of GDP, meaning space to collect more resources was significant. However, it was worth considering broadening tax bases rather than hiking taxes.

Curtailing tax exemptions, deductions and credits could add an extra 2% to 4% of GDP in the value of collections.

Kieswetter said revenue administrations around the world faced challenges including the changing landscape, artificial intelligence, ageing workforces, growing debt levels and the proliferation of cross-border tax and financial crime.

“These [challenges] seem to be top of mind with others who hold the same job I do. As foundational elements for improving domestic resource mobilisation, there is an indivisible nexus between policy and administration and I cannot say that louder and more emphatically. Tax policy is only as good as the ability and capacity to administer it.”

Godongwana said the global tax system complexities were a concern, especially for emerging economies. Capacity constraints also limit information sharing that could assist transparency on beneficial ownership of taxable structures.

“The introduction of the global minimum tax is an important step towards achieving this goal. We believe it offers all countries, developed and developing economies, the opportunity to strengthen their tax base in cases where multinationals operating in those countries are not taxed sufficiently in other jurisdictions. This will enable better domestic resource mobilisation for all countries.”

He said diverse collaboration on tax administration reform was challenging but embracing diversity would result in better solutions. Domestic tax policy reform and tax administration policy are critical to meeting the UN sustainable development goals.

“The UN can also assist in giving developing countries a voice to address their challenges and concerns. The UN process should never be seen as an alternative or opposing process to that of the G20, nor should it lead to division. Both processes can be beneficial to all countries here, as more co-operation and more input will lead to a sustainable outcome.”

Tax proposals and reforms must align with each country’s needs. “We need momentum to address resource mobilisation challenges. Leverage experiences and views of G20's previous achievements from various countries will be invaluable,” he added.

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