Kazakhstan needs to strengthen its public finances to achieve inclusive and resilient growth

Astana government should reduce tax exemptions, streamline different tax regimes, and gradually implement progressive income tax, suggests a new report.

Endowed with fiscal reserves from oil revenues, Kazakhstan’s public finances need improvement for the country to follow a more inclusive and resilient growth path, according to new analysis carried out by the World Bank.

The analysis, Kazakhstan: Strengthening Public Finance for Inclusive and Resilient Growth, recognises the efforts made by the Kazakh government to enhance its fiscal and budgeting policies while keeping its government debt at a relatively low level.

Nonetheless, the report highlights the lack of clarity in the country’s fiscal stance and the potential risks posed by the quasi-fiscal activities to the budget and productivity growth.

Kazakhstan is striving towards greener and more inclusive growth in a difficult external environment. The country is experiencing greater external volatility, which is linked to increased global interest rates, more fluctuating oil prices, disruptions in supply chains, and higher costs of food commodities.

Over the last 20 years, Kazakhstan’s non-oil revenues have remained stagnant as a percentage of GDP. This has left the budget heavily reliant on oil revenue and increased the use of quasi-fiscal spending, making macro-fiscal policy management more complicated. Kazakhstan is also facing a two-prong challenge from the green transition: not only has the government to decarbonise the country’s economy, but it is also doing so relying on oil revenues, which are exposed to oil price fluctuations and increasing risks as other countries strive to reduce their reliance on fossil fuels.

“Given the challenging prospects for growth, improvement of public finance policies has never been so important for Kazakhstan,” says Andrei Mikhnev, World Bank country manager for Kazakhstan. 

“Streamlining and strengthening fiscal rules and controlling quasi-fiscal spending can ensure better macroeconomic stability and enhance productivity. By improving budgeting, planning, and monitoring results, we can achieve better spending outcomes that will benefit the entire population of Kazakhstan.”

The authors of the report also argue that broadening the institutional coverage of the fiscal framework to quasi-fiscal activities and monitoring the contingent exposure of quasi-fiscal activities are needed. The fiscal framework should also support the long-term growth agenda, mainly through public spending on education and supporting the green transition. Meeting emerging expenditure pressures will also require improved efficiency in delivering public services.

A more progressive tax system

The Kazakh government aims to increase non-oil budget revenues to finance the increasing social spending needs. Rising to this challenge will require new revenue policies and a reform of the tax system. The report underlines Kazakhstan’s revenue gap from having multiple tax regimes and various exemptions and proposes policy reforms that would help increase the fairness of the tax system.

“Kazakhstan may want to consider making its revenue policy more progressive,” said Sjamsu Rahardja, a senior economist at the World Bank. “Reducing tax exemptions, streamlining different tax regimes, and gradually implementing progressive income tax scheme can improve revenue collection and make the fiscal policy more pro-poor and supportive to climate agenda.”

According to the report, Kazakhstan’s prolonged under-spending on education, coupled with policies that channeled resources toward academic excellence, raised the learning outcomes for a small segment of students, while leaving many behind in their acquisition of skills and knowledge.

Kazakhstan should accompany the recent increase in education spending by optimising the local school network coupled with reforming teachers’ remuneration system to avoid inefficiencies and address inequities in the current education financing system.

The report presents a convincing argument for the implementation of such reforms.

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