Key Principles of Fiscal Decentralization

Abstract

Outlines key principles of fiscal decentralization, as drawn from the academic literature, including: (1) the rationale for devolving service provision and financing responsibilities to subnational governments; (2) guidelines for assigning particular expenditures and revenues across levels of government; and (3) a framework for designing and allocating intergovernmental transfers. The decentralization of responsibility for the provision and financing of services from central governments to subnational governments remains a pervasive phenomenon in developing and transition countries. In theory, decentralization results in a better match between subnational public service delivery and diverse citizen preferences. The most commonly stated objectives for intergovernmental transfers include adequacy, equity, efficiency, and performance. In general, individual types of grants require matching with objectives. The impact of intergovernmental fiscal transfers on subnational education spending depends, in theory, on the type of transfer. Conditional transfers have a larger effect on education spending than general transfers, because subnational governments must spend targeted conditional transfers in the education sector.