The effects of globalization are perceived in the area of public administration as well as in many other areas and shows up as delegation of duties and authorities from central to local governments. This phenomenon is called decentralization that in a way requires local governments to have fiscal autonomy. Hereby, it is common for local governments to use their autonomy in infrastructure finance in many countries. It would also be possible for our country s local governments to have fiscal autonomy if capital markets, providing long-term finance, are utilized. In this study, we discuss several models, which local governments may utilize capital markets, and try to evaluate how to improve these models. We conclude that, investment trusts specialized in infrastructure finance would play a role of a central hub, where lots of capital market models may be implemented all together.
This research was conducted to empirically prove the effect of financial performance measured from the ratio ofexpense to income, fiscal efforts, financing capability, and the level of fiscal decentralization degree towards anumber of variables, which are: (1) capital expenditure, (2) economic growth and poverty, (3) economic growthand poverty through capital expenditure, and (4) poverty through capital expenditure and economic growth.This research was performed using path analysis method. The samples of this research are 38 districts/cites inEast Java Province during the last 7 years (2005-2011).The result of this research shows that the financial performance measured from financing capability showsinsignificant direct effect towards capital expenditure and economic growth while the effect to poverty showspositive significant effect. Furthermore, from the effects of indirect financial performance through capitalexpenditure, there are variables of expenditure to income ratio, fiscal efforts, and degree of fiscaldecentralization variables which have significant indirect effects towards the economic growth (in a positive way)and poverty (in a negative way) while for the financial performance effects through capital expenditure andeconomic growth to poverty have significant indirect and negative influence, particularly those are measuredusing expense to income ratio, fiscal efforts, and the level of fiscal decentralization. Finally, in order to betterfinancial performance in particular it is necessary to optimize the financing capabilities in terms of both revenueand expenditure, in terms of revenue optimization of PAD, Silpa, and loan, while expenditure optimizers need toconduct a review of expenditure that has been done. Keywords : financial performance, expense to income ratio, fiscal effort, financing capability, the level of fiscaldecentralization, capital expenditure, economic growth, poverty
This paper studies the political economy of pricing and investment for excludable and congestible public goods in a federal state. Currently, we observe a wide variety of practices, ranging from federal gasoline taxes and road investment to the local supply of -- and sometimes free access to -- libraries, parking spaces and public swimming pools. The two-region model we develop allows for spill-overs between regions, it takes into account congestion, and it captures both heterogeneity between and within regions. Regional decisions are taken by majority voting; decisions at the federal level are taken either according to the principle of a minimum winning coalition or through cooperative bargaining. We have the following results. First, when users form the majority in at least one region, decentralized decision making performs certainly better than centralized decision making if spill-overs are not too large. Centralized decisions may yield higher welfare than decentralization only if users have a large majority and the infrastructure in a given region is intensively used by both local and outside users. Second, if non-users form a majority in both regions, centralized and decentralized decision making yield the same socially undesirable outcome, with prices that are much too high. Third, both bargaining and imposing uniform price restrictions across regions improve the performance of centralized decisions. Fourth, the performance of decentralized supply is strongly enhanced by local self-financing rules; it prevents potential exploitation of users within regions. Self-financing rules at the central level are not necessarily welfare-improving. Finally, the results of this paper contribute to a better understanding of actual policy-making.
This article reflects some results of the work undertaken by the expert working group on optimization of public expenditures in the area of governance which contributed to the overall efforts on evaluating efficiency of the federal budget expenditures and forming recommendations on the optimization of such expenditures in 2013. This evaluation was conducted jointly by the Russian Academy for National Economy and Public Administration (RANEPA) and National Research University – Higher School of Economics (NRU-HSE) in cooperation with the Ministry of Finance, Ministry of Economic Development, and other federal authorities. The article is focused on the influence of decentralization policies on the efficiency and effectiveness of public spending both in a broad context and in one, based on the practice of delegating some federal powers to the constituent entities (regions) of the Russian Federation. Analysis of the federal budget execution data as well as some public sectors’ statistics demonstrates that the practice of delegation of the Russian Federation’s powers to the sub-national level which was accompanied by relevant budgetary transfers (subventions) has led to an excessive growth of the federal budget expenditure on the relevant areas (as compared to the GDP growth for the same period and the growth of the federal budget expenditures on the public administration as a whole). At the same time –at least in the selected cases –the efficiency and effectiveness of public spending, including performance outputs have decreased aft er the delegation of powers took place. Decentralization based on the delegation of powers has also resulted in new functions aimed at controlling the effectiveness of the delegated authorities’ performance. As a result, total administrative costs have increased. Given these conclusions it is recommended to switch from the practice of delegating authority to the practice of reallocating certain powers among the levels of government with a parallel reallocation of the budget revenue sources. Such a reallocation should be based on a detailed profound review of the efficiency and effectiveness of decentralization in each particularsector, with both the options of further devolution and recentralization being considered.
This paper shows that the inefficiency of fiscal decentralization in the presence of spillovers, a main tenet of the decentralization literature, is overturned in a particular transportation context. In a monocentric city where road (bridge) capacity is financed by budget-balancing user fees, decentralized capacity choices (made by individual zones within the city) generate the social optimum despite the presence of spillovers. This conclusion is closely tied to the famous self-financing theorem of transporation economics.
Fiscal decentralization is an important influence factor on the autonomy of local government. To the extent in which a local government benefits from amounts and transfers from the central government, it depends on it and has a reduced capacity to make decisions about the services they provide to citizens, local autonomy being limited. Even if the legal framework for decentralization was created in Romania, we still can not talk about a high degree of financial autonomy of local governments. Further, significant amounts from the state budget are transferred to local budgets to cover local expenses. Moreover, despite consistent efforts to implement the decentralization process, there is a series of imbalances, especially in smaller territorial administrative units that are clearly disadvantaged both in terms of financial capacity to finance themselves through local taxes and duties, and especially in terms of the low absorption capacity of European funds. In general, in Romania, the degree of financial autonomy differs nationally from the city level and from the village level.
Fan and Lv (2012) have convincingly argued that China's public debt, including borrowings by local governments, is relatively small and manageable. They have also correctly pointed out that over the last 10 years, while debt owed by local governments has surged, the government's contingent liabilities, which take into account the need to use public funds to bail out state-owned banks with large nonperforming loans, have declined sharply. I have little disagreement with Fan and Lv's conclusions, and my comments, which cover four major issues, are meant to clarify some details. My first comment relates to centralization versus decentralization. Fan and Lv argue that China has a centralized fiscal system (de jure) based on the facts that top local officials are appointed by the central authority, tax revenues largely accrue to the central government, and the central government monopolizes the right to issue debt to the public. However, some economists have argued that China has a decentralized system (de facto) based on the facts that local government expenditures are very large relative to the central government expenditure, formula-based equalization transfers are relatively small, revenues from land sales make up a large share of total local government revenues, and borrowing by local government “financing platforms” helps to fund infrastructure projects. Even if we accept that China has a centralized fiscal system, based on the case of Japan, which has a centralized fiscal system but is running one of the largest budget deficits in the world, I still have some doubts about whether centralization necessarily means fiscal prudence (small budget deficits and public debt) as argued by Fan and Lv. There is also a debate over whether decentralization favors economic growth. On the pro side, fiscal decentralization promotes competition among local governments, and it acts as a major force of economic development in China. On the con side, fiscal decentralization fragments the national market, encourages local protectionism, induces duplicated investment, and, hence, negatively affects economic growth. Second, I would put more emphasis on land prices and pension liabilities as major determinants of fiscal balances and, thus, the size of the public debt. A fall in land prices affects the fiscal position of local governments in the following two ways. On the one hand, it leads to a decline in their revenue, since proceeds from land sales are a major source of revenue for local governments. On the other hand, some local government financing platforms involved in property development (if not speculation) using funds borrowed from banks may have difficulty servicing those loans. Pension liabilities relating to urban workers under the previous pension regime, the so-called legacy costs, are estimated to range from 82% to 130% of 2008 gross domestic product (GDP), depending on assumptions made (World Bank and Development Research Center of the State Council of the People's Republic of China, 2012). Ultimately, this obligation will have to be paid down through fiscal resources and should be counted as part of the government's contingent liabilities. Third, I think more attention should be paid to the future trends of revenues and expenditures when discussing fiscal sustainability. On the revenue side, growth in fiscal revenues is expected to slow down as the pace of China's economic growth declines due to demographic changes and to the diminishing advantage of backwardness as China approaches the stage of an advanced economy. On the expenditure side, there is a pressing need to further increase spending on education, health, social protection, and environmental protection. Part of these incremental expenditures could be met through a reallocation of spending away from infrastructure investment. Finally, I agree with the view expressed by the World Bank and Development Research Center of the State Council of the People's Republic of China (2012) that enhancing fiscal sustainability in China calls for raising revenues by further reforms in the following six directions: (i) higher taxes or prices on energy, water, natural resources, and pollution; (ii) raising state-owned enterprise dividend payments to the general budget; (iii) further mobilizing personal income taxes, which make up only 1% of China's GDP compared with an average of about 6% in high-income countries; (iv) enhancing the taxation of motor vehicles and pricing of parking and congestion; (v) enhancing property taxes; and (vi) auctioning public resources such as bandwidth user rights, franchises for public utilities, and exploitation rights for natural resources. These measures should improve not only fiscal sustainability but also improve equity and efficiency for the Chinese economy as a whole.
Abstract Making use of the data envelopment analysis (DEA) technique and taking undesirable fiscal phenomena into account, this paper comprehensively quantifies the public finance performance of local governments in China during the course of fiscal decentralization reform. The introduction of undesirable fiscal outcomes into this assessment makes it possible to identify meaningful and informative characteristics of local public finance performance in China. When reforms are first implemented, local public financial performance improves because undesirable fiscal phenomena have not yet become too serious. The tax sharing system reform did not work well in its early stages, and negatively impacted public expenditure efficiency. The reform started to play a substantial role between 2001 and 2005, when local governments experienced better public finance performance. Corresponding to the deterioration of the financial sector in recent years, local public financial performance worsened after 2007. Further reform of the current fiscal and taxation system is necessary in China, to ensure a brighter future for the nation.
Fiscal decentralization has gained support by most of the world’s leading development organizations including the World Bank, United States Agency for International Development and, Asian Development Bank among others in the last two to three decades. It is therefore of much importance that some form of thought is given to the operations of this system to make it more beneficial. Drawing selectively on large academic and practical literature on fiscal decentralization and the articles in this volume, this article outlines the state of fiscal decentralization in current times. It then goes on to outline some key arguments in favor of and against fiscal decentralization as a system of government. The theoretical framework of fiscal decentralization is also discussed in this article with regards to the stabilization, distribution and allocation functions. An overview of this system of government so far as Ghana is concerned has also been touched on with much emphasis on the legal framework and the key sources of finance for subnational governments. Finally, a number of factors for improving and making this system more beneficial and sustainable over time are identified.
Anwar Shah, Riatu Mariatul Qibthiyyah, Astrid Dita
Indonesia has come a long way from centralized governance to decentralized local governance, and today Indonesia ranks among the most decentralized developing countries. The Government of Indonesia is revisiting all aspects of local governance to make appropriate legal and institutional adjustments based on lessons leaarned during the past decade. An important area of this re-examination and possible reform is the central financing of subnational expenditures. The system of intergovernmental finance represents one of the most complex systems ever implemented by any government in the world. The system is primarily focused on a gap-filling approach to provincial-local finance in an objective manner to ensure revenue adequacy and local autonomy but without accountability to local residents for service delivery performance. This paper takes a closer look at Dana Alokasi Umum -- the most dominant program of unconditional central transfers to finance provincial-local government expenditures in Indonesia. The paper also presents illustrative simulations of alternative programs and compares these with the existing Dana Alokasi Umum allocations. The paper concludes that super complexity leads to lack of transparency, inequity, and uncertainty in allocation. Simpler alternatives are available that have the potential to address autonomy and equity objectives while also enhancing efficiency and citizen-based accountability. Such alternatives would represent a move away from the complex gap-filling approach to simple output-based transfers to finance operating expenditures. Capital grants would deal with infrastructure deficiencies. And the alternatives would institute fiscal capacity equalization as a residual program with an explicit standard to ensure that all local jurisdictions have adequate means to deliver reasonably comparable levels of public services at reasonably comparable levels of tax burdens across the country.
Андреас Каппелер, Albert Solé‐Ollé, Andreas Stephan, Timo Välilä
Spending on productive infrastructure is seen as an important contributor to long term economic growth. Several authors have documented a downward trend in public investment during the last three decades and warned about its possible detrimental effects on the economy. A not well-realized fact is that productive infrastructure investment is mostly provided by sub-national governments. The aim of this paper is to analyze the effect of revenue decentralization on the provision of infrastructure at the sub-national level. We estimate the effects of revenue decentralization and earmarked grant financing on the level of sub-national infrastructure investment in 20 European countries over the period 1990-2009. The findings are compared to those obtained when using sub-national investment in redistribution, for which the theory predictions are different. To account for the high auto-correlation in the dependent variable, we apply a dynamic panel data approach. In particular, we use a Corrected Least Squares Dummy Variable (LSDVC) estimator with the lagged dependent variable included to account for the dynamic character of the dependent variable. The empirical analysis shows that decentralisation in terms of tax shares increases public investment in infrastructure; public investment in redistribution is not significantly affected by decentralisation. The positive link between total regional investment and decentralisation suggests that decentralisation on regional infrastructure investment is additional and does not go hand in hand with a considerable reduction in other types of regional investment, such as health, education or safety. As to investment grants, they have a positive impact on both types of regional investment. The negative interaction between investment grants and decentralisation for regional infrastructure investment suggest that the impact of tax decentralisation on regional infrastructure investment declines with increasing receipts of investment grants by regional governments. This result is intuitive. As the significance of the tax-decentralisation parameter suggests, higher regional decision autonomy leads to more investment in infrastructure. Attempts to undermine the power of regions through the backdoor - e.g. by introducing conditional transfers - will at least partly offset the positive effect of decentralisation.
Gover Baja Daza, Sergio Villarroel Böhrt, David Zavaleta Castellón
The second generation fiscal federalism (SGFF) approach is used as a reference to analyze the political and fiscal institutional design of Bolivia’s decentralization model and its evolution. Subnational public finance data up to 2008 is used to verify that decentralization of expenditure was higher than that of revenue, establishing a context of vertical fiscal imbalance that increased due to growing fiscal transfers during the positive external shock (boom) period. Consequently, the subnational fiscal surplus was not a result of internal efficiency but of excess revenues from such transfers. Panel models were estimated to identify and assess the implicit incentives embedded in fiscal institutions of the decentralization model. Findings at the municipal level are: i) misalignment of local spending with local interests due to dominance of transfers over own revenue (dominance of central government development policies); ii) incentive to spend transfers faster than own revenue (flypaper effect); iii) greater marginal contribution of own revenue to positive fiscal balances compared to transfers, thus introducing the seed for a soft budget constraint but hidden by the fiscal surplus; iv) disincentive to generate own revenue (tax and non-tax) due to the size and growth of transfers (disincentive to the culture of contributing to own revenue). Findings at the prefectural level are: i) misalignment with regional interests given the dominance of transfers over own revenue due to absolute lack of tax powers (until 2009); ii) high tendency to a soft budget constraint and, eventually, also fiscal bail-out, hidden by the fiscal surplus; iii) in only two departments collection of national-level taxes were higher, compared to transfers received in the same departments; iv) disincentive to pay the VAT (national-level tax) due to higher royalty transfers received, an effect not extended to other national-level taxes; v) high dependence from hydrocarbon-based transfers, and fiscal risk when this natural resource declines (both in volume and prices) due to volatility of international oil prices. Also, as a result of the decentralization model a positive and significant impact was found on education-coverage indicators, an important development objective of the national government.
Núria Vergés Bosch, Mateu Espasa, Albert Solé Ollé
Contents: Preface 1. Inter-regional Fiscal Flows: Introduction to the Issues, Nuria Bosch, Marta Espasa Queralt and Albert Sole Olle PART I: COUNTING MONIES: MEASUREMENT AND PRACTICE OF INTER-REGIONAL FISCAL FLOWS 2. Regional Fiscal Flows: Measurement Tools, Giuseppe C. Ruggeri 3. Regional Fiscal Flows: Determinants, Measurements and Meanings, Francois Vaillancourt Comment by Nuria Bosch and Antoni Zabalza 4. Constitutional Reforms, Fiscal Decentralization and Regional Fiscal Flows in Italy, Maria Flavia Ambrosanio, Massimo Bordignon and Floriana Cerniglia 5. Measurement and Practice of Fiscal Flows: The Case of Belgium, Paul Von Rompuy 6. Balance Sheet Federalism: Canada, Giuseppe C. Ruggeri Comment by Francois Vaillancourt 7. Balance Sheet Federalism: Methodologies, Results and their Determinant Factors for Spain, Marta Espasa Queralt and Nuria Bosch Comment by Guillem Lopez Casasnovas and Ramon Barberan PART II: BEYOND THE DATA: WHY SOME REGIONS GET MORE MONEY? 8. Federalism and Inter-regional Redistribution, Jonathan Rodden Comment by Carles Boix 9. Decentralization by Politicians: Creation of Grants-financed Local Jurisdictions, Stuti Kehmani 10. The Political Rationale of Regional Financing in Spain, Sandra Leon Comment by Santiago Lago 11. The Determinants of Regional Transport Investment Across Europe, Achim Kemmerling and Andreas Stephan 12. The Determinants of the Regional Allocation of Infrastructure Investment in Spain, Albert Sole-Olle Comment by Germa Bel PART III: IN OR OUT? REGIONAL REDISTRIBUTION AND THE STABILITY OF FEDERATIONS 13. Federalism, Regional Redistribution and Country Stability, Enrico Spolaore Comment by Massimo Bordignon 14. The Costs and Benefits of Constitutional Options for Quebec and Canada, Francois Vaillancourt 15. Staying Together? Scotland and the Rest of the United Kingdom, David Bell 16. The Costs and Benefits of Staying Together: The Catalan Case in Spain, Elisenda Paluzie Index
This dissertation examines local governments’ efforts to promote economic development in Latin America. The research uses a mixed method to explore how cities make decisions to innovate, develop, and finance economic development programs. First, this study provides a comparative analysis of decentralization policies in Argentina and Mexico as a means to gain a better understanding of the degree of autonomy exercised by local governments. Then, it analyzes three local governments each within the province of Santa Fe, Argentina and the State of Guanajuato, Mexico. The principal hypothesis of this dissertation is that if local governments collect more own-source tax revenue, they are more likely to promote economic development and thus, in turn, promote growth for their region. By examining six cities, three of which are in Santa Fe—Rosario, Santa Fe (capital) and Rafaela—and three in Guanajuato—Leon, Guanajuato (capital) and San Miguel de Allende, this dissertation provides a better understanding of public finances and tax collection efforts of local governments in Latin America. Specific attention is paid to each city’s budget authority to raise new revenue and efforts to promote economic development. The research also includes a large statistical dataset of Mexico’s 2,454 municipalities and a regression analysis that evaluates local tax efforts on economic growth, controlling for population, territorial size, and the professional development. In order to generalize these results, the research tests these discoveries by using statistical data gathered from a survey administered to Latin American municipal officials. The dissertation demonstrates that cities, which experience greater fiscal autonomy measured by the collection of more own-source revenue, are better able to stimulate effective economic development programs, and ultimately, create jobs within their communities. The results are bolstered by a large number of interviews, which were conducted with over 100 finance specialists, municipal presidents, and local authorities. The dissertation also includes an in-depth literature review on fiscal federalism, decentralization, debt financing and local development. It concludes with a discussion of the findings of the study and applications for the practice of public administration.
Financing of local authorities is currently at the Centre of the political discourse is a daily concern. Romania faces, usually with an attempt to offset the need for control and reduction of public spending with greater financial autonomy of local authorities. At the time, it was searched and searches for a path, a means to achieve a fair distribution of financial resources between the various levels of administration, budget reductions to all of them. If strengthening democracy means to strengthen local autonomy, then it means you have created a system for financing local authorities to be efficient, fair and pointing towards the economic needs of States. In other words, decentralization and local financing and the principle of subsidiarity are mutually dependent. Rightly, the decentralisation of financial management is considered to be the "backbone" of the administrative system of decentralisation, the financial resources being those which are operational link between the needs of local communities and the rules necessary to satisfy them. Thus, the lack of financial resources of the local self-government can result in failure to meet the needs of its members, which at the same time failure of administrative decentralization. The decentralisation of financial management can also be seen as the Government of some specific functions on the line of management authority and the tax revenue to the local public authorities.
The aim of this paper is to present a frozen image of the current Spanish system of fiscal federalism, in light of the tensions that the economic situation, has brought about. With this purpose, I will first broadly offer an outline of how decentralized Spain actually works, and how the decentralization process was brought about. Then I will focus on how the financing system works for most Autonomous Communities. Finally, I will attempt a preliminary analysis of the recent constitutional reform. A main conclusion of this paper is that fiscal federalism in Spain is, in fact, a work in progress. This paper has been previously published at the eJournal of Tax Research, (Australia); Volume 10, N. 1/2012.
This thesis is entitled ’Fiscal policy and economic growth in the presence of intergenerational transfers’. It is composed of four self-contained chapters and focusses on the growth and welfare effects of taxation and public spending. The common denominator of all four chapters is that they incorporate an endogenous growth process in an overlapping generations model to evaluate long-term policy implications when different generations are affected in different ways by fiscal policy. In the first and second chapter the implications of capital income taxation for the growth process are discussed. The analysis emphasizes the role of public and private intergenerational transfers in form of public pensions and bequests as well as intergenerational redistribution induced by public policies. Among other results, it turns out that the presence or absence of such transfers critically determines whether an increase of capital income taxes with additional revenue being devoted to cut wage taxes may enhance economic growth. In the third chapter, the focus of the analysis is on social security funding and its implications for economic growth. Whereas a pay-as-you-go pension scheme, as considered in chapter one, naturally includes intergenerational transfers from the current working generation to retirees, a fully funded social security system does not. Still, the presence of such transfers within the economy in form of private educational spending and bequests turns out to play a key role in deter- mining the impact of funded social security on economic growth. More specif- ically, it is shown that a funded pension scheme may harm growth if there are operative bequests within the family, and parents thus face a trade-off between educating their children and leaving bequests. By contrast, when bequests are inoperative, the Ricardian equivalence holds and an increase in forced savings is exactly offset by a reduction in private savings leaving capital accumulation and educational spending unchanged. Chapter four discusses the impact of fiscal decentralization on economic growth in the context of education funding. While the traditional theoretical literature on fiscal decentralization focusses mainly on efficiency issues, empirical evidence for a positive relationship between fiscal decentralization and economic growth turns out to be mixed. Some studies can confirm the positive impact of higher degrees of decentralization on economic growth, whereas others face difficulties in establishing a positive relationship and, in fact, obtain either no dependency or a negative one. The aim of the fourth chapter is therefore to further evaluate the theoretical linkage and, at the same time, to give an ex- planation for the discrepancy between the empirical literature. The analysis reveals that there exists a growth maximizing degree of fiscal decentralization. Furthermore, it is shown that some degree of fiscal decentralization is always superior (in terms of long-run growth and welfare) to a system where either local or central governments exclusively finance educational investments.
One important aspect of fiscal decentralization policy is delegation of authority and responsibility of management of public finance to regional governments, especially those of municipalities/districts. After more than ten years of implementation, it is now the right time to evaluate the policy questioning how effective its impacts on regional economic development. The study intends to find on how effective the performance of regional public finance is in providing basic infrastructures and how effective the provision of basic infrastructures reduces the poverty rates. By using panel data methods, this study confirms the positive relationship between performance of regional finance management and provision of basic infrastructures (especially those of road and electricity, but not that of drinking water). On the other hand, the relationship between the provision of basic infrastructures and poverty rates, as expected, is negative. This finding strengthens the belief that it is necessary to further enhance the basic infrastructures development to reduce poverty rates.