Getting Targets Right: How Much Revenue can Lower-Income Countries Raise?

Abstract

Lower-income countries have huge financing needs. While tackling the climate challenge and achieving the Sustainable Development Goals requires substantial capital investments, the Covid-19 epidemic has highlighted an urgent need for spending on health and social protection. One recent report estimated the investment needs for low- and lower-middle-income countries (henceforth, lower-income countries) at US$3 trillion per year by 2030. This represents about 7 per cent of these countries’ combined GDP, and is a herculean challenge, particularly for low-income countries. While loans have long played a central role in bridging the financing gap, rising interest rates have made this even more difficult, and debt servicing costs are increasingly making up frightening proportions of government spending. And yet, on average, low-income countries raise just under 13 per cent of GDP in taxes, versus over 35 per cent on average in OECD economies, and the rate of growth of their tax ratios remains slow.