Developing Asia's fiscal landscape and challenges

Abstract

While tax revenues steadily rose in the decades prior to the onset of COVID-19, they continue to lag well behind high-income countries and some developing peers. The region continues to rely predominantly on indirect taxes, particularly relatively efficient consumption taxes. However, developing Asia's tax structure is less progressive compared to high-income countries. Government expenditures on education and health, vital for promoting equitable growth, were comparatively modest. Substantial fiscal policy stimulus in response to COVID-19, combined with the impact of the downturn on revenues, has severely weakened public finances in many countries. The combination of falling revenues and higher spending during COVID-19 has markedly widened deficits and caused a further rise in debt levels that were already rising. As the pandemic recedes, governments will need to carefully calibrate fiscal consolidation to safeguard fiscal sustainability while protecting the poor and vulnerable.