Small Governments, Big Ambitions (Fiscal Policy in East Asia and Pacific)

Over the last three decades, most countries in the East Asia and Pacific (EAP) region have achieved high growth, while taxing little and spending within their means. The region has relied on low tax rates and used the limited revenues for public investment, especially on infrastructure. While this restrained fiscal stance has supported growth and macroeconomic stability, it has also led to underinvestment in education, health, social protection, and adaptation to climate change. One result has been the uneven development of human capital which hinders the transition to more skill-intensive growth. Another is heightened exposure to shocks for both countries and individuals in a region that is rapidly aging and increasingly vulnerable to extreme climate events. The report will examine how EAP economies can reform their fiscal frameworks to support growth and ensure that it is inclusive and resilient. Given the constraints on direct taxation in a world where capital and skills are mobile, revenue mobilization could rely more on uniform indirect taxes. However, with the political difficulty of widening indirect taxes in a region where inequality is high, the tax effort would need to be credibly complemented by targeted transfers to meet social protection goals, as well as investments in human capital and climate adaptation, all of which can contribute to higher and more inclusive growth.