DarĂo Cestau, Burton Hollifield, Dan Li, Norman SchĂźrhoff
The effective functioning of the municipal bond market is crucial for the provision of public services, as it is the largest capital market for state and municipal issuers. Prior research has documented tax, credit, liquidity, and segmentation effects in municipal bonds. Recent regulatory initiatives to improve transparency have made granular trade data available to researchers, rendering the municipal bond market a natural laboratory for the study of financial intermediation, asset pricing in decentralized markets, and local public finance. Trade-by-trade studies have found large trading costs, contemporaneous price dispersion, and other deviations from the law of one price. More research is required to understand optimal market design and the impact of post-crisis regulation, sustainability, and financial technology.
This paper discusses how decentralized countries can achieve sound fiscal relations between the central government and lower government levels. The concepts of âvertical gapâ and âvertical balanceâ provide an analytical framework for identifying and addressing key challenges. These concepts can help policymakers ensure that the financing of subnational governments (composed of transfers received from the center, own revenues, and borrowing) is both efficient and adequate given the allocation of spending responsibilities. More generally, the paper offers some perspectives about the optimal design of decentralization systems by examining the sequencing and economic principles underlying revenue and expenditure assignments, the use of transfers, and borrowing.
Sustainable and inclusive growth in emerging Asian economies requires continued high levels of public sector investment in areas such as infrastructure, education, health, and social services. These responsibilities, especially with regard to infrastructure investment, need to be devolved increasingly to the regional government level. However, growth of sources of revenue and financing for local governments has not necessarily kept pace, forcing them, in some cases, to increase borrowing or cut spending below needed levels. This chapter reviews alternative models of the relationship between central and local governments, and provides an overview and assessment of different financing mechanisms for local governments, including tax revenues, central government transfers, bank loans, and bond issuance, with a focus on the context of emerging Asian economies. The chapter also reviews financing mechanisms for local governments and mechanisms for maintaining fiscal stability and sustainability at both the central and local government levels. Based upon the evidence on the decentralization process in Asia, it proposes some policy implications for improving centralâlocal government relations and fiscal sustainability.
Fiscal decentralization is seen as part of a reform agenda in developing countries to strengthen regional and local governments. It is believed that it improves the efficiency of public service delivery through preference matching and allocation efficiency. In light of this, this study was conducted to assess the practices of Woreda level fiscal decentralization in Addis Ababa City Government. In doing this study, explanatory mixed method research design was followed. Subjects of the study were government officials working in selected Woredas and sub-cities of Addis Ababa city. In the study, multi-stage sampling technique was used to select representative respondents. To this effect, one hundred ninety-two participants were selected using multi-stage sampling technique. Besides, sub-city and Woreda Finance and Economic Development Bureaus officials were purposely selected to conduct key informant interviews. The data gathering instruments were questionnaire, key informant interviews, and document analysis. The study followed statistical tests to test the research hypotheses. It applied Kruskal Wallis test of significance. The study involved strict respect for informed consent, voluntary participation, and confidentiality. The findings of the statistics tests indicates that respondents' responses concerning autonomy of Woredas in planning and budgeting, revenue generation and retention, expenditure assignments were significantly different. This implies that there is absence of uniformity in the practices of these aspects of fiscal decentralization in the city. On the contrary, the respondents' response concerning the functionalities of institutional and legal frameworks, inter-governmental fiscal relations, challenges, and constraints of fiscal decentralization, were not significantly different. In general, the practice of fiscal decentralization in the city was limited as existing institutional and legal frameworks were in short of clarity and uniformity. Respondents stated that Woreda administrations had weak revenue base, and need clear planning and budgeting, and expenditure assignment autonomy. Based on the findings of the study, the research hence recommended that existing institutional and legal frameworks should be structured in the way that it enables Woreda administrations to generate and utilize sufficient revenues, plan and budget their own activities, have clear autonomy of expenditure assignments. Inter-governmental fiscal relations should also be planned to reduce the vertical imbalances observed at Woreda Administration level.
In the terms of decentralization and local autonomy, increase of financial capacity, is the result of more use of fiscal and financial instruments, as well as increasing the effectiveness work of the local government. They are facing a series of complex issues related to the functions they have to carry and their financial capacities against these needs. Local Government Units in Albania have few funds to fill the needs for financing great projects mainly infrastructure, so in this paper we aim to analyze the financing instruments of local government. Borrowing from financial institutions and second level banks is the main financial instrument for Local Government to financing their great investment for the community. This is a new financing instrument for LGUs in Albania that is considered as a strong financial lever to enable the financing of their budgets and great projects capital investment. Another instrument are guidelines constructed in similar models and experiences of countries in political and economic tradition with that of Albania, the issue of bonds of LG / municipal bonds which are regulated by laws. Programs of international agencies to support lending to the local government is also another a significant financing instrument for LGUs in Albania to fulfilled their needs. DOI: 10.5901/ajis.2016.v5n3s1p387
Objectives: This study is aimed at analyzing various facets of Fiscal Federalism and its impact on the growth of states in India. Methods/Analysis: The Study proposes a model to test the impact of autonomy and hard budget constraints, two important features of decentralization, on the economies of the states. The model has been analyzed using the Fixed Effects Least Squares method for panel data using EViews. Findings: The results point out quite a few aspects of the impact of fiscal federalism on Indian states. The paper concludes by giving possible reasons for the negative relation between autonomy with growth and the positive relation between central grants with growth. The fact that the OwnTax ratio is negatively related to the GSDP growth rate shows that the level of autonomy of a state is negatively related to the growth of the state. The study also revealed a high dependence of the states on the grants and tax sharing mechanisms for growth. It was found that the central intervention in the statesâ economy was positively related to their growth, which points to soft budget constraints on the states which depend highly on the central government to finance their spending. The overall level of decentralization was also found to be quite poor, though the relationship is not very economically significant. Applications/Improvement: The Study highlights that trade-off between the autonomy and budget constraint aspects of fiscal federalism needs to be a major concern and work area for policy makers in India.Keywords: Economic Growth, Fiscal Federalism, Tax
Political economy theory expects politicians to use budget deficits to engineer an election-timed boom, known as the political business cycle. We challenge and contextualize this view by incorporating the financial constraints faced by governments into an electoral framework. We argue theoretically that the extent of ownership dispersion among creditors has important effects for governmentsâ policy autonomy. Specifically, we contend that when highly indebted governments become more reliant on international bond marketsâas opposed to traditional bank lendingâpoliticians alter the way they respond to domestic constituents. In an econometric test of 16 Latin American countries, from 1961 to 2011, we show that financial decentralization breeds austerity. More specifically, we find that politicians exhibit more fiscal discipline when they fund a greater share of their spending through decentralized bond markets. Furthermore, we find this disciplining effect to be particularly strong during election periods.
This dissertation comprises three empirical essays in political economy. The first essay analyzes the implementation of a French social program by subnational governments following a decentralization reform. Using program implementation data, it shows that local political environments strongly influence implementation decisions after decentralization, and that decentralization results in an overall tightening of benefits. The second essay reports the results of a conjoint field experiment involving German welfare offices. Using random assignment of cues about ethnicity and other characteristics in requests to welfare offices, it is shown that putative non-German applicants receive replies at the same rate as putative Germans, but are disadvantaged in terms of the substantive quality of responses. This suggests that minority populations do experience discrimination when attempting to access social benefits. Finally, the third essay uses micro-level voter file data from Illinois to measure whether property tax limitations reduce participation in local elections. In contrast with prior research, results from panel regressions with matching adjustments suggest that tax limitations do not affect political participation negatively. Together, these essays contribute to our understanding of public finance and social policy in contexts characterized by multi-level governance.
Fiscal decentralization and intergovernmental fiscal relations reform have become nearly ubiquitous in developing countries. Performance, however, has often been disappointing in terms of both policy formulation and outcomes. The dynamics underlying these results have been poorly researched. Available literature focuses heavily on policy and institutional design concerns framed by public finance, fiscal federalism, and public management principles. The literature tends to explain unsatisfactory outcomes largely as a result of some combination of flawed design and management of intergovernmental fiscal systems, insufficient capacity, and lack of political will. These factors are important, but there is room to broaden the analysis in at least two potentially valuable ways. First, much can be learned by more robustly examining how national and local political and bureaucratic forces shape the policy space, providing opportunities for and placing constraints on effective and sustainable reform. Second, the analysis would benefit from moving beyond design to considering how to implement reform more strategically.
Fiscal decentralization has been established in the Peopleâs Republic of China (PRC), but crises emerge at the local government level due to remaining problems of the fiscal administration system of tax allocation and the impact of replacing the business tax with a value added tax. The PRC taxation system requires readjustment and local governments have begun to focus on innovative financing models. The main path to stable and sustainable government finances is to maintain the general public budget and the government fund budget. The present chapter shows that use of innovative fundraising and financing channels will lead to the upgrading of local government infrastructure and public services. Suggestions for enhancing local government fiscal stability and sustainability include: reducing the fiscal burden at the local level by standardizing and legalizing outlay establishing a modern taxation system; establishing a standardized and predictable transfer payment system by introducing block transfer payments and prioritized transfer payments as a basis for a stable growth mechanism for general transfer payments; promoting publicâprivate partnership legislation to encourage participation of social capital and maximize the multiplier effect of public expenditure; and improving the mid-term budget and debt-annexed budget and establishing a government planning mechanism for investment and debt financing of major infrastructure construction projects.
This thesis explored, in two parts, the macroeconomic impacts of exchange rate regimes (ERR), as well as the recent developments in fiscal policy and fiscal decentralization. Part I has reconsidered the role of ERR and its interplay with fiscal, monetary and tax policy. The first result that emerges (Chapter 1) is that fixed ERR can serve as a credible policy tool for stabilizing fiscal policy. However, this stabilizing effect is conditional upon the inter-temporal distribution of the costs of loose fiscal policy. In assessing the linkage between ERR and crises (banking/financial, currency and debt), Chapter 2 evidenced that the bipolar view is no longer valid, and that, crisis proneness rather depends on the macroeconomic fundamentals (the volatility of private sector credit, the deficit-financing mechanism, and the debt-to-GDP ratio). In Chapter 3, we unveiled a strong relationship between ERR and tax policy. Countries with pegged regimes have greater reliance on domestic taxation -such as the VAT- to make up for the loss of seigniorage revenue (substitution effect). Moreover, peggers tend to collect more VAT revenue to offset the shortfall in cross border taxes following the trade liberalization reform (competitiveness effect). Part II discussed the cyclical response of fiscal policy in high debt periods, and focused on fiscal decentralization issues. In Chapter 4, we showed that the reaction of fiscal policy to the business cycle is non-linear and conditional to the level of public debt. When the debt-to-GDP ratio goes beyond a certain threshold (87%), fiscal policy loses its counter-cyclical properties. Further, we highlighted that carefully-designed fiscal rules help maintaining counter-cyclicality through an ex ante disciplinary effect. Chapters 5 and 6 analyzed the impact of fiscal decentralization on the efficiency of public service delivery and fiscal policy performance, respectively. Chapter 5 revealed that a sufficient level of expenditure decentralization, coupled with revenue decentralization, improves the efficiency of public service delivery. However, the political and institutional environment is critical for reaping decentralization-led benefits. Lastly, Chapter 6 concluded that fiscal decentralization has destabilizing effect by reducing the counter-cyclicality of fiscal policy. In addition, we found that decentralization strengthens the structural fiscal balance; however, vertical fiscal imbalances reduce the benefits of decentralization. It is therefore critical to limit asymmetries between expenditure and revenue decentralization, so as to reduce the transfer-dependency of local governments to the central level, and thus prevent decentralization from weakening the fiscal stance at the general government level.
Local Government finance is of immense importance for a state and for the government functions of rendering services to the citizens. Local finances reflect the fiscal independence of municipalities and the financial capacity to carry out its responsibilities under the legal provisions of the central government. It is therefore very important to monitor the development of local finance in transition countries and in transferring experiences from countries with higher fiscal decentralization to countries which are pre-accesion candidates to EU. Countries with higher fiscal decentralization are more acceptable bycountries that are recently new members of the European Union under similar region. In this study, a parallel overview of the local finances of new member country in the EU, Slovenia and pre-accesion candidate country to the EU i.e. Macedonia, was taken
This thesis brings out the important roles that the public sector finance and reforms play in shaping nations' welfare through providing empirical evidence using new data sets on the links between government spending and inflation, and between fiscal decentralization and development outcomes for the four Asian emerging economies of India, China, Indonesia and Vietnam. Chapter 2 empirically tests the nexus between government spending and inflation for the three countries of India, China and Indonesia utilizing the cointegration and the Vector Error Correction Model (VECM) method on time series data for the period 1970-2010. This chapter employs a bivariate VECM of government spending and inflation and, to address potential endogeneity concerns, two trivariate models with real GDP and nominal exchange rate separately added. The results show a cointegrating long-run relationship between government spending and inflation and that, in the short run, government spending can significantly influence the rate of inflation (positively for India and Indonesia while negatively for China). An important policy implication is that governments in the region would need to be more prudent regarding decisions to change government spending, which can potentially result in large fluctuations in inflation. Chapter 3 shifts the focus to fiscal policy matters at sub-national levels. This chapter examines the effects of fiscal decentralization on economic growth at the provincial level in Vietnam, an Asian economy with rapid growth performance resulting from the comprehensive reform, 'Doi Moi', starting in 1986. Using a newly available provincial-level dataset spanning the period 2004-2010, this chapter provides evidence that fiscal decentralization has had a significant and positive impact on provincial economic growth in Vietnam during the period of analysis. The measure of fiscal decentralization adopted captures both the fiscal capacity and autonomy of provinces. The fixed-effect and the Generalized Methods of Moments (GMM) models help address the unobserved heterogeneity and potential endogeneity issues. Finally, Chapter 4 further quantitatively investigates the effects of fiscal decentralization on development outcomes. Specifically, the two main hypotheses to be tested in this chapter are whether fiscal decentralization had significant effects on poverty outcome and health outcome at the provincial level in Vietnam during the period 2006-2011. Given the important role of the agriculture sector, the chapter also tests for other hypotheses that are concerned with sectoral growth patterns, the contribution of agricultural growth to poverty reduction, and the urban-rural gap in poverty. The main results suggest that fiscal decentralization had a positive effect on health outcomes but, surprisingly, did not contribute to poverty reduction. Another finding is that agricultural sector has made a significant contribution to poverty reduction in dominantly agricultural provinces. Also, the poorer regions have benefited from agricultural growth more than growth in other sectors. Finally, the chapter does not find significant evidence for the urban-rural gap for poverty in Vietnam. On balance, from a policy maker's perspective, while growth-enhancing effects are encouraging, the potential distributional effects of fiscal decentralization warrant careful considerations of the reform agenda so that the poor and the disadvantaged can share the gains in potential benefits.
Recent theoretical research suggests that financing sub-national governmentsâ expenditure out of own revenue sources is linked to more responsible budgeting, because the financial implications of spending decisions then are internalized within a jurisdiction. We test this proposition empirically on a sample of 23 OECD countries over the 1975-2000 period, and find evidence in line with the hypothesis that greater revenue decentralization (measured as sub-national governmentsâ share of own source tax revenues in general government tax revenue) is associated with improved sub-national government budget deficits/surpluses. This finding is cross-validated with a novel, independent dataset consisting of all 34 OECD member states from 2002 to 2008.
The purpose of this paper is to give a general overview on the decentralization process and on the financial autonomy of local government units in Albania. The principal base for the analysis done is the legal framework, accompanied shortly with examples of its implementation in several communes or municipalities. The paper is organised in 3 issues, which treat respectively the organization of local government in Albania, decentralization of functions and responsibilities in favour of the units of local government, and their budget and resources of financing. There has been some difficulties in practice during decentralization process raised out when fulfilling the whole legal framework on exercising exclusive and shared competences of local units of government, because of the dependence by the respective institutions for the implementation of legal acts for exclusive and shared functions in the fields of education, economic support and health care, and by lack of funds of the responsible ministry to transfer the service of water supply. In Albania seems yet early to give right importance to regions, and especially with regard to the aspirations for European integration many challenges raise to the Albanian institutions.
The changes in the system of intergovernmental fiscal relations in Bulgaria commenced at the beginning of the 1990s with the enactment of legislation on local self-governance and the first timid attempts at an expenditure and revenue assignment between the levels of government. The process began to gather momentum in 2002 when the government adopted a Concept paper on fiscal decentralization and an action plan on its implementation. A number of key reforms were legislated with the aim of broadening the municipal own-sources revenue base and increasing local government revenue autonomy. Dedicated action to set a decentralized public finance system in place resulted in a visible improvement of financial self-sufficiency of local authorities. Although still low in a European context, the values of fiscal decentralization indicators have gradually risen over the years, which is indicative of the success of the reform. The purpose of this paper is to overview the development of the process of fiscal decentralization in Bulgaria in the period 2003-2012 through examining its key aspects â expenditure responsibilities, revenue assignment and intergovernmental transfers â and to assess the policy options for addressing the current problems of local finance system. DOI: 10.5901/mjss.2014.v5n23p342
This dissertation aims to explain the nature, cause, and consequence of informal fiscal decentralization in China since 1994. The 1994 tax reforms intended to strengthen the central government taxing power by increasing tax revenue through the tax assignment system. China also prohibited local government debt taking, while increasing intergovernmental transfers between the central government and local government. These series of China's centralization reforms in 1994 have realized uneven success. Central government tax revenue was improved significantly. However, local government still takes debt through the financial platform companies. The increased intergovernmental transfers did not decrease regional disparity, which is one of the goals of the central government. These are the unintended consequence of the centralization reform that this study tries to account for. This study shows that revenue centralization unintentionally aggravates problems of local public finance. While maintaining the budget balance according to budget law, local government has carried out competitive economic growth and expenditure management. The ability to manage expenditure and attract investment is the criteria employed to evaluate the accomplishment of local leaders. This study finds that prohibition of local government debt in China is constrained by their social network. This norm influences the strategy of local governments to increase their debt taking beyond the realm of formal rules under the competitive environment. This study also demonstrates that centralization of revenue made local governments increasingly resort to intergovernmental transfers, which in turn fail to reduce inequality across jurisdictions. This study argues that an informally decentralized state reduces the merits of the decentralization. The informal consequence of the political and fiscal systems in China result in local leaders that acquire the medium level of change in power, while pursuing fiscal decentralization and maintaining political centralization. However, the unintended consequence is the retreat of the fiscal system, such as the increased fiscal instability and large gaps across jurisdictions.
The paper focuses on Romanian experiences regarding the financial strategies used by managers from pre-university education. In Romania, local public authorities provide funds to pre-university institutions. Given the sharp economic recession and the austerity measures imposed by Romanian government, the public executives had to find solutions in collecting additional funds and in spending wisely the existing financial resources. Therefore, our paper aims at examining several practices regarding: (i) employees' wages, (ii) EU funds implementing, (iii) self-financing activities, (iv) public procurement and (v) balancing strategies for the budgets, which could improve the financial management of public institutions. This also can contribute to the increase in the efficiency of spending at micro-level within public administration.
Open access
Fiscal Policies and Political Economy
Economic Analysis and Policy
Education, Management, Technology, Human Resources
TWith the help of the available literature, the paper attempts to assess critically the main problems of municipal finances in India and to bring out the challenges that the municipalities face with respect to revenue generation and expenditure management. The main findings suggest that the urban local bodies in India are confronted with lack of proper decentralization of functions and finances, inadequate revenue generation, expenditure shortfalls leading to poor service delivery. It also analyses the suggestions and recommendations that have been offered in the literature to cope with these critical challenges relating to urban finance.
Johnatan Rafael Santana de Brito, JoĂŁo Ramos Matos Filho, Edward Martins Costa
the Brazilian tax structure has specific characteristics and the performance level of government. Although there was a better regulation of these transfers after the enactment of the Fiscal Responsibility Law, it is observed that the amount of resources transferred to the municipalities of Rio Grande do Norte is quite high. In light of the theory of federalism and fiscal decentralization, in particular, the theories related to intergovernmental transfers seek to diagnose the transfers from the systematization of information as to the origin, value and destination. We used the econometric model of Dynamic Panel System GMM in diagnosis and verification of the impact of transfers on public finances of municipalities in the RN, a dynamic econometric model that captures the lagged effects of variables making use of adjustment mechanisms based on a model differences distributed so that the dependent function is a concatenation of variable contemporary and out of phase. The data point to what is predicted in theory: an increasing trend of dependency. The paper presents some proposals for the transfer system and the composition of spending in order to contribute to greater tax efficiency.
The District Development Fund program or model was introduced in Lao People Democratic Republic in 2005, with the technical and financial support of United Nations Capital Development Fund, as a core part of the Governance and Public Administration Reform Programme, which was jointly supported by United Nations Capital Development Fund and United Nations Development Programme. The District Development Fund program was designed to be an effective approach and support methodology suitable for a low capacity environment in order to help deliver better public services to rural and remote communities in Lao PDR. The DDF has since been expanded to fifty two (52) Districts (of a total of 148 Districts) across the country. DDF aims to sustainably improve local public services delivery through the strengthening of capacity of local district administration and demonstrating improved financial management systems and procedures that can contribute positively in this objective. It does this by providing both discretionary development grants together with capacity development and support to improvements systems and procedures for local development. However, there has been little external research undertaken to date on âassessment of the District Development Fund program as an effective approach to strengthen public service improvement for decentralized and better service delivery in Lao PDR, and whether the District Development Fund program has positively affected the capacity of local authorities to delivery prioritized local public servicesâ. This article addresses this by looking at the empirical results from the DDF program and draws on experiences on how DDF program has been operating and contributing on the ground in building local capacities, in financial management, planning and budgeting, to enhance the local authoritiesâ ability to finance local priority services. The DDF for government has become the viability and positive results of empowering local authorities and communities as part of public administration reform, that is not only a government fund transfer mechanism a form of fiscal decentralization but also has proven to be very well suited to the low capacity environment in Lao PDR A better people-focused service delivery has mostly been achieved by empowering sub-national administrations to take a more effective role in leading local socio-economic development, which is to bring about tangible improvements in public services to people and a real reduction in local poverty. The most significant lesson of the DDF experience in Laos has been its ability to achieve results that have led to improvements in pro poor service delivery combined with improvements in the capacity of local administration in planning, budgeting and monitoring services. A critical lesson in achieving these results has been ensuring that new systems and procedures fully align with existing government processes . This not only helps to improve capacity development but also ensures innovations, which is more cost effective and scalable in future by working through existing governance systems. Greater district and community oversight and accountability result in funds being well spent with minimum leakages. This article, to a large extent, is entering new ground where there is little other independent research or documentation available. Thus the approach relies on conducting structured evaluation dialogue with the direct stakeholders, including the Ministry of Home Affairs, Governance of Public Administration Reform /District Development Fund project team, national and local practitioners and representatives of the communities involved, combined with a review of the available documents and data. The methodological tools used were interviews, workshops, focus group discussions, data analysis and document review. Keywords: Service delivery, Building capacity, Financial management, Planning and budgeting management, Local authority, District development fund approach.