New empirical analysis shows that fiscal policy in Timor-Leste has been unable to stabilize macroeconomic fluctuations over the last couple of decades. Timor-Leste collects relatively little non-oil tax revenue and the large public expenditure envelope relies heavily on withdrawals from the Petroleum Fund. Characterized by low tax collection and low tax effort, Timor-Leste’s tax system simultaneously displays long-run buoyancy of greater than one—suggestive that growth has improved fiscal sustainability over time. This study concludes that tax policy reforms are important to support domestic resource mobilization efforts. The introduction of a modern value-added tax (VAT) can complement other tax administration reforms. Finally, greater mobilization of domestic resources should go together with more efficient public spending.
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