Rare is the government today whose fiscal challenges don’t handcuff leaders seeking to provide for the future through investments in infrastructure, education and healthcare. Often the difference between funded and deferred policy priorities comes down to the perennial and seemingly intractable challenge of revenue lost to tax noncompliance and improper government payments.
Our analysis suggests that close to 20 percent of government revenues worldwide, or about $5 trillion, go missing each year, either in dollars owed but never paid or in outbound payments gone awry. In this era of growing demands for government services and pressing budget challenges worldwide, few fiscal opportunities loom larger than reducing these leakages (Exhibit 1).
The good news is that truly game -changing advances in big data and advanced analytics are providing governments with capabilities that would have been difficult to imagine even five years ago.
While applying these new capabilities in revenue administration and payments is still a young science, some pioneers are already securing large gains. In one case, a ministry of finance set up a new unit to combine data sets from tax, customs and business registrations, along with external data from the banking sector, to target fraud and noncompliance. The team quickly integrated new data and analytics to identify suspicious patterns of customs declarations and tax payments. Within a matter of weeks, the unit was testing interventions and plugging revenue gaps that previously would have taken years to uncover. In another example, a finance ministry and a tax authority collaborated on a completely new approach to compliance infused by analytics strategies and identified opportunities to increase total revenue collected by 5 percent over several years.
Overall, our research suggests that in larger, developed economies, these capabilities have the potential to increase total government revenues by 1 to 3 percent. In less-formal, developing economies, the opportunity is much larger, as much as 10 percent or more. To put this number in context, worldwide government deficits are expected to be 2.6 percent of estimated GDP in 2021.1Improving revenue collections just 1 percent of GDP would eliminate over one-third of the deficit, equipping leaders to make and implement better policy choices.
Unfortunately, a handful of common barriers stymie government efforts. First, we find that very few governments globally have taken the systematic approachnecessary to deploy these new capabilities at scale. Second, agencies often lack exposure to and experience with the latest innovations. Third, well-meaning civil servants may resist analytics-driven approaches that may challenge long-held assumptions and practices. Finally, effective use of analytics requires mastery of rapid, small-scale tests that can push the boundaries of traditional organizational agility.
Still, leading governments have realized that the value at stake greatly outweighs these challenges and there are emerging practices that can be deployed to surmount them.
Citizens, increasingly accustomed to businesses’ sophisticated use of data and analytics, will create urgency and expectations of innovation within governments. The increasing pace of innovation will make the gap between followers and innovators more difficult to surmount.
This article explores why governments now have unparalleled opportunities for improving their outcomes in revenue administration and payments, how big the opportunity could be, and what it takes to effectively seize it.
A rapidly changing game
The substantial leakage of government revenues and improper payments is a persistent challenge for governments. However, three trends create a unique and immediate opportunity for governments to mobilize for greater success — the availability of data, the plummeting costs of data and analytics tools and storage and new techniques for translating analysis into action.
The explosion in available data
The rapid digitization of consumer and business life is transforming the way that companies and governments conduct their business. Digitization creates a massive trail of data that can support more-effective revenue and payment programs. There is an emerging consensus globally that governments can and should use this data to reduce revenue leakage, subject to strong privacy constraints prescribed by policy makers.
Consider the following examples:
•As e-commerce swells and cash becomes less prevalent, tax authorities can unearth businesses that have been “off the radar.” In developed countries, the share of cash transactions by value has tumbled by half in the past decade. Across Sweden, Norway, and Denmark, the share is less than 1 percent (Exhibit 2). More than half of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits.
•The volume and quality of satellite and other digital imagery brings new opportunities to use geospatial data to address fraud and leakage, such as by identifying suspicious payment addresses and detecting undervalued properties for tax purposes.
•Governments themselves have increasingly digitized operations, making previously offline or limited digital data sets much richer and timelier. Examples include data on business ownership, professional licenses, travel records, and police and court records.
•Private companies also have significant amounts of data that can inform government administration. For example, power-consumption patterns may indicate a likely presence of a business operation in a home or a larger commercial enterprise than reported.
• Cooperation and data sharing among global tax authorities is accelerating, with standardized reporting by and about multinational enterprises and on individual holdings.
Examples include the Organisation for Economic Co-operation and Development’s Common Reporting Standard and the US Foreign Account Tax Compliance Act.
Newly accessible and affordable tools
Not only are more data available, but it is now significantly faster and cheaper to extract, process, store, and analyze them. This makes it possible to rapidly transform data into insights and to put both data and insights directly in the hands of decision makers.
Legacy processes for ingesting and storing data are being completely transformed by the following:
• rapid advances in data assembly and storage capabilities (for example, through cloud technologies, unstructured data lakes, and data warehouses)
• an expanding set of tools to manage and manipulate unstructured data such as free text images, sounds, and video
• quickly evolving algorithms that can automatically detect patterns across vast sums of complex data (for example, to detect unusual concentrations of payments going to a specific geography, or to uncover hidden links with known fraudsters)