By Richard Johnstone | 22 April 2014

Many developing countries in Asia must step up tax reforms because they face increasing borrowing costs as capital markets recover from the global financial crisis, the International Monetary Fund has said.

Speaking at the IMF’s high-level tax conference for Asian countries yesterday, the fund’s deputy managing director Naoyuki Shinohara said fiscal policy needed to focus on ‘rebuilding fiscal space’ through lower borrowing. Increasing tax revenues and cutting spending was vital to allow automatic stabilisers to work in any future crisis, as well as provide room for a discretionary fiscal response.

Shinohara highlighted that in most advanced economies, the pace of fiscal consolidation would slow in 2014 as the amount of average gross debt is stabilised.

However, among emerging market economies in the region, deficits remained significantly above pre-crisis levels as most countries had opted to postpone either spending cuts or tax rises, he said.

Action to tackle these deficits was getting more urgent, he warned, as government borrowing costs were beginning to increase as a result of the global recovery.

‘In countries more closely integrated with international capital markets, the normalisation of global liquidity conditions has begun to raise borrowing costs and financial volatility, giving yet greater urgency to fiscal consolidation,’Shinohara said.

‘Fiscal space is shrinking in many low-income countries as revenue mobilisation has lagged behind fast spending growth.’

Developing countries in Asia must therefore increase efforts to raisedomestic tax revenue, while also increasing the efficiency of public spending through action such as streamlining subsidies, he said. There was often substantial room to raise extra revenue from new taxes, or apply existing levies to a broader range of items, in both emerging market economies and low-income countries.

‘Broadening the base of the value-added tax ranks high in terms of economic efficiency almost everywhere and can in most cases be combined with adequate protection for the poor, though this can of course be a particular challenge in lower income economies,’ Shinohara said.

Attempts to reform international corporate taxation – being led by the G20 and the Organisation for Economic Co-operation and Development – would be difficult, he warned.

However, progress on this issue was especially important given that many developing countries are reliant on corporate taxation, often from a handful of multinationals.