Use of tax expenditures in budgeting

4. Opportunities and challenges

This section provides an overview of common issues found in the budgeting and financial management of tax expenditures and identifies possible areas of improvement to mitigate these issues.

4.1. Opportunities for further work

Tax expenditures are a complex area of government expenditure. This paper focuses on how to strengthen the fiscal control of tax expenditures through budgetary processes, including parliamentary processes. It identifies three areas for further exploration based on the challenges identified from the case studies:

• One ongoing challenge relates to how to identify a consistent benchmark on a cross-country basis for tax expenditure. Increasing the consistency of benchmarks would improve the fiscal impact assessments on how a tax expenditure is likely to impact budget aggregates and the government’s fiscal outlook. While several bodies, including the OECD, have published guidance on the development of benchmarks, such guidance generally focuses on good practices, rather than requirements for what should be included (or excluded) from a fiscal management perspective. The development of a more granular definition of a benchmark that aligns to budget management practices would improve the assessment and transparency of how tax expenditures impact on a government’s fiscal position.

• Greater development of expenditure evaluation frameworks is warranted, so that the evaluation findings can be acted upon to support better fiscal management. In this paper, the OECD found that the number of evaluation frameworks for tax expenditures is steadily increasing. The finding provides a basis for strengthening the system of evaluation for tax expenditure in government.

• Finally, from a fiscal control perspective, an exploration of possible ceiling mechanisms for tax expenditures would be beneficial. Quantitative ceilings to limit the budgetary cost of tax expenditure are rare. In cases where they are covered, they are generally at an aggregated level, such as deficit and government debt rules. A greater understanding of what dedicated ceilings could look like in practice, how existing attempts have performed, and which governance arrangements to apply could better support the fiscal control and management of tax expenditures.

4.2. Challenges and areas for improvement

4.2.1. Institutional responsibilities

a. Institutional responsibilities for tax expenditure should include the relevant line ministry through the budget process in conjunction with the ministry of finance, and in particular for refundable tax credits. In most case study countries, tax expenditures are managed by the body or bodies responsible for tax administration. However, as tax expenditures are programmes with specific policy goals, they are also relevant to the line ministries responsible for those policy goals. For example, tax expenditures to encourage corporate investment are relevant to the ministry responsible for economic development. Similarly for family tax credits, the social development ministry has a direct interest. As such, the policy responsibility of relevant line ministry should be recognised in the institutional arrangements, and the line ministry should receive data from the tax administration authorities on the performance of the relevant tax expenditures so the line ministries can monitor performance. Ministries of finance should maintain the ability to review and advise government on any proposed tax expenditure, as set out in the Tax Incentive Principles specified by the Platform for Collaboration on Tax (PCT, 2025[42]).

As refundable tax credits ultimately involve direct expenditure, they should also be treated in a comparable manner to institutional responsibilities for direct expenditure. The relevant line ministries should have responsibility for the funding and performance of refundable tax credits. Establishing institutional responsibilities for line ministries will not be appropriate in all circumstances and does not change the tax administration role performed by tax authorities, but it recognises the policy responsibility that line ministries and the advice they develop on the appropriate mix of policies.

4.2.2. Tax expenditures with the budget process

b. Line ministries should prepare cost estimates for all tax expenditures (new and existing) in the budget. As tax expenditures are a form of government expenditure, the cost of the expenditure should inform budget decisions. The cost estimates should be prepared in collaboration with budget offices, tax authorities and the relevant line ministries that have the policy responsibilities.

c. The timing of tax expenditure reporting should align with reporting on the budget to provide decision makers with comparable information on all forms of expenditure. The annual calendar for publishing reports on tax expenditures can differ from the timing of budget reports, which makes it more difficult for ministries and the legislature to consider the fiscal impacts of both tax expenditure and budget expenditure in their decision making. Better alignment would better support informed decision making and strengthen the transparency of the government’s fiscal management.

4.2.3. Tax expenditure relative to direct expenditure

d. Analysis of tax expenditure in the budget should include assessments on whether other policy options, including direct expenditure, would meet the same policy objectives. While the case studies in this paper show that there are some instances where tax expenditures have benefits over direct expenditure, such instances are a minority. More often, direct expenditures are more measurable, more equitable and easier to apply (and remove) than tax expenditures. As highlighted in OECD (2026[19]), measures such as training programmes or income support can be more useful than tax expenditures in certain contexts. As such, when a line ministry proposes a new tax expenditure, it should demonstrate why other options would not be more appropriate. This is particularly relevant in cases where a proposed tax expenditure is developed through the budget process, as the budget provides a vehicle for the direct expenditure alternative.

4.2.4. Limits on the use of tax expenditure

e. Sunset clauses should be implemented and observed as a default practice. Within the case study countries, sunset clauses on tax expenditures apply to only a proportion of tax expenditures. As tax expenditures should only serve a specific policy goal, they are no longer required when the goal is met. The default practice, from a budgetary perspective, should be for tax expenditures to cease when a policy goal has been met, thus allowing for other potentially more appropriate interventions to take their place. The relationship between tax expenditures and policy goals further supports the observations in (b) above.

4.2.5. Tax expenditure evaluation

f. Tax expenditure evaluations should be used to better understand the fiscal impacts of tax expenditures, particularly in the budget process. It is increasingly common for OECD Member countries to publish annual reports on tax expenditure. However, these reports differ from in-depth evaluations to understand whether policy objectives are met, as recommended in the OECD Practical Guide to Investment Tax Incentives (OECD, 2026[19]) and how the fiscal cost is evolving relative to what was intended when the tax expenditure was introduced. Such in-depth evaluations should be systematic, to determine on a regular basis whether the tax expenditures remain fit for purpose.