Governments around the world are under intense pressure to improve their fiscal positions. According to the International Monetary Fund, most countries in the Organisation for Economic Co-operation and Development (OECD) will need to reduce deficits by at least 4 percent of GDP by 2020 to meet their long-term targets for public debt.
As they strive to simultaneously increase revenue and cut costs, government agencies can learn a great deal from each other. But they have historically invested little effort in comparing their performance against their counterparts in other countries, or exploring how other agencies have overcome financial challenges and achieved fiscal stability.
In line with our commitment to evidence-based public service, the McKinsey Center for Government (MCG) is partnering with agencies and experts worldwide to build a fact base that will help officials learn from their peers and understand the practices that drive excellence in fiscal management.
Drawing on McKinsey’s experience working with government agencies across the globe, and in collaboration with our internal and external network of public-finance experts, MCG is creating unique knowledge in two areas critical to sound fiscal management: budgeting and tax administration.
Faced with fiscal challenges, many governments have launched spending reviews to find cost-cutting opportunities. Each country takes a different approach to conducting a spending review and trimming the budget, thus making it difficult for government leaders to compare and learn from each other’s performance. To help address this lack of uniformity, we are developing the McKinsey Government Budget Benchmarking (MGBB) database, a comprehensive resource that offers a standard budget taxonomy to facilitate comparisons across public agencies in all categories of operational expenditure. Because it is global in scope, MGBB is useful for agencies that want to create tailored peer sets based on sector, mission activities, and scale.
We have discovered that overhead functions typically account for 30 to 35 percent of governments’ operating expenses. Based on benchmarks from private and public organizations, we believe government agencies have the opportunity to save 5 to 10 percent of their operating expenditures in overhead functions alone.
Tax administrations in every country perform the same core functions. Since 2008, we have been collecting and analyzing data from tax administrations around the world, generating unique insights about critical performance drivers and best practices in submissions processing, examinations and audits, collections, and taxpayer services. We examine personal and corporate income tax as well as value-added tax, which together represent 54 percent of all tax revenues and equal 18 percent of an average OECD country’s GDP.
We have assembled—and continue to add to—a global database of tax practices, with information from more than a dozen countries. In studying over 100 tax practices, we found that one major performance driver is sophisticated taxpayer segmentation—that is, dividing the taxpayer base into distinct groups and developing customized approaches for each group. Countries that use analytics in segmenting the taxpayer population for examinations, for instance, have lower examination costs and assess up to 10 times more tax revenue per FTE.
Research and collaboration
We are continually broadening and deepening our understanding of excellence in fiscal management by collaborating with public-sector bodies and leading experts around the world. We are committed to building a knowledge base that will empower governments everywhere to tackle their most complex fiscal challenges.
One of our research initiatives, for example, is an extensive survey that provides cross-country comparisons of taxpayers’ perceptions, interactions, and level of satisfaction with their tax authorities. Among our early findings—based on responses from more than 5,000 taxpayers in 10 countries—is that in some countries 60 percent of taxpayers take less than an hour to complete their tax forms, while in other countries only about 20 percent of taxpayers do so. Countries can enable greater voluntary compliance and achieve higher taxpayer satisfaction by making their tax code easier to understand.
Our benchmarking studies are an ongoing effort and can only benefit from the participation of more agencies and countries. An increase in the number of countries contributing their data and expertise will result in even richer insights. For further information or to discuss potential collaboration and participation in our research, please contact us.