Local government finances have been assuming greater importance in India, particularly after the decentralization movement started with the 73rd and 74th constitutional amendments in 1992. The structure and trend of the finances of urban local governments is widely varied, yet, it is not so well-documented. This paper is an attempt to provide an outline of urban public finances of select cities in India. It presents the structure of the aggregates of municipal finances of these select cities and the trends over a period of time, so as to give an overview of how well they are placed and how good their movements are. It discusses both revenue and expenditure accounts as well as the capital and current account balances of the urban local governments. Local government finances of cities—both on the revenue and expenditure side—present a weak base and loose foundations compared to those of other countries, and therefore, point to the need for bringing about reforms in that direction among these institutions.
Sonia Esteban Laleona, Pablo de Frutos Madrazo, María José Prieto Jano
Traditionally, the academic debates about the benefits that the existence of multilevel government structures provide have been directly related to the gains in efficiency that derive from the processes of decentralization of the Public Sector. However, as of the last decades, the Public Finance has broadened its analysis towards other questions, one of them being if the fiscal decentralization influences positively in the economic growth of a country. The objective of this document is to provide a "reading guide" for this new line of investigation on the influence of fiscal decentralization on regional economic growth.
The paper tries to shed some light on the problems of centralization and decentralization within an economic union and the federal member states. Integration and decentralization are not opposite policy strategies but both meaningful if the single public goods and services supplies are analyzed in more detail. Both strategies doubtlessly have advantages, which can be realized if the manifold possibilities are combined in an efficient approach of good governance. Best practice approaches in inter- or supra-national integration, fiscal federalism and taxation do exist and have to be successfully implemented. Obviously such a modern fiscal policy has to be accompanied by an appropriate monetary policy, which in an economic union has to be carried out by an independent central bank as one of the necessary countervailing powers in a democratic setting. A modern fiscal policy strategy efficiently controls budget deficits, which naturally have to be limited to finance reliable public investments. Such strategy has to be safeguarded through modern methods of budgeting and fiscal planning. Modern public management with a clear code of conduct for the government officials ensures corruption free administration.
European finance is becoming increasingly cross-border, while the European architecture for safeguarding financial stability - including decision-making processes for providing financial-stability public goods - have remained decentralized with some explicit mechanisms for coordination across countries. Policy makers are aware of the limitations of the existing institutional setting, but opinions on how to proceed, including on burden sharing, are lining up along national and regional political lines with less attention paid to European needs. This paper applies the 'economics of alliances' to examine these European policy challenges. The paper establishes benchmarks for assessing the ability of Europe's existing institutional architecture to efficiently allocate resources to safeguard the EU financial system against systemic threats to stability, such as the insolvency of a pan European bank.
This article analyses the relationship between decentralization and the extent of fiscal discipline in the Swiss cantons between 1984 and 2000. From a theoretical point of view, decentralization and federalism can be associated with both an expansive and a dampening effect on government debt. On the one hand, decentralized structures have been argued to lead to a reduction of debt due to inherent competition between the member states and the multitude of veto positions which restrict public intervention. On the other hand, decentralization has been claimed to contribute to an increase of public debt as it involves expensive functional and organizational duplications as well as cost-intensive, often debt-financed, compromise solutions between a large number of actors that operate in an uncoordinated and contradictory way. Our empirical results show that in periods of prosperous economic development, the architecture of state structure has no impact on debt. However, the degree of decentralization influences debt in economically poor times: In phases of economic recession, administratively decentralized cantons implement a more economical budgetary policy than centralized Swiss member states.
The relationship between regional imbalances and strengthening of the financial system is not simple though it may seem so at first sight, given that developing countries have less developed financial systems. In a national financial system as in Brazil this aspect deserves special treatment, particularly if we recognize that regional development policy cannot be studied without considering macroeconomic policy, fiscal mechanisms of public financing, the nature of fiscal federalism and the Fiscal Responsibility Law. 2 In this sense, the decentralization, the fiscal federalism as well as the autonomy of sub-national governments are crucial for articulating regional development policy in Brazil. In fact, the share of tax revenues and the autonomy of federative units are critical success factors for financing regional development. Therefore, the Constitutional Funds for regional development, created through the Constitution of 1988 in Brazil, as well as others regional development funds have an important role. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
Development of the European integration through the European Union (EU) considers not only strengthening integration from the economic aspect (internal market). It also considers the political aspect of the integration i.e. strengthening political integration of member states and their citizens. Political segment of integration considers strengthening of the internal policies of the EU in which fiscal system, i.e. public finances have extremely important role. The EU fiscal system presents reflection of the extremely strong and often confronted interests between the economic and the political integration. These issues are closely related to the second component of the European politic and economic integration, that are the fiscal relations between the EU “central” level and the national “lower” levels which bring the all important decisions in the EU. According to the theory of public finance (fiscal federalism) and the criteria of economic efficiency, fiscal functions (allocation, redistribution, stabilization) and activities are assigned to the different levels of government, as well as certain resources for their financing. On the basis of fiscal functions carried out by national levels in the EU, and the manner of their financing, the EU is a prominently fiscally decentralized complex community. The traditional approach to the fiscal federalism that fiscal authorities are transferred from central to lover levels means that this is a process of decentralization, while in the case of the EU this means centralization of fiscal authorities from the level on national states to the EU as a supra-national level. The main goal of this paper is to analyze fiscal relations in the EU according to basic fiscal functions: allocation, redistribution and stabilization. Methodology would include analysis and comparison of positive EU aspect with normative aspect of public finances in multi-level community. Induction of gained results will confirm thesis that, because of political restraints, development of common (central) system of the EU public finances is based on alternative approaches of harmonization and cooperation.
In this paper we review the fiscal evolution of China and Russia, asking how the process of creating a separate, tax-financed public sector in the two countries differed. We observe that the size of China's budget sector was consistently smaller than in Russia and that budget decentralization was consistently greater. We see both pros and cons in China's decentralization. Local governments that were allowed to keep marginal increases in local tax revenue had incentives to pursue growth-supporting policies, including support for foreign investment and export-oriented production. However, in the absence of financial markets, there were barriers to investment outside the local region, resulting in inefficient use of capital and protectionism. Fiscal deficits and rapid expansion of credit have threatened stability in both countries, but China has proved more successful than Russia in managing macroeconomic policies. Finally, we argue that Russia's status as a petro-state makes management of the public sector particularly difficult. In Russia, recentralization has been associated with expansion of state ownership of enterprises and production by territorial governments, state ministries, state banks, and the natural monopolies.
In the late 1990s the Indian state of Tamil Nadu experienced an unprecedented fiscal deterioration, which was part of the widespread fiscal deterioration in Indian states. This deterioration was troubling because current expenditure outgrew total revenue, leaving little fiscal space for infrastructure spending. The paper presents a framework for subnational fiscal sustainability analysis and applies it to Tamil Nadu where subsequent fiscal adjustment has been ambitious and politically challenging, but has promised to put state finance on a sustainable path and create fiscal space for infrastructure investment. The paper emphasizes the differences between fiscal sustainability analysis at the national and subnational levels, attempts to take into account uncertainty, and discusses the key components of the state's fiscal accounts and how they respond to reforms and shocks. Risks to Tamil Nadu's fiscal outlook include interest rate shocks, pressures on the primary balance, and contingent liabilities. Though the state's efforts to remove constraints to economic growth, minimize recurrent expenditures and maximize its revenue potential will be critical for fiscal sustainability, national policies feature prominently in subnational fiscal adjustment. Tamil Nadu's quest for fiscal sustainability is relevant for other countries. Decentralization has given subnational governments in developing countries significant spending and taxation responsibilities, and the capacity to incur debt. The fiscal stress of the Indian states echoed the fiscal crises of subnational governments in several other major emerging economies.
There is increasing interest in fiscal decentralization in Peru as a mechanism to generate more involved decision-making at the subnational level. This is tempered with a continuing emphasis on overall fiscal stability. However, considerable work needs to be undertaken to define more clearly expenditure responsibilities and financing mechanisms that increase local accountability. In addition, a more transparent fiscal transfer system is needed, together with clarity in expenditure management at all levels of government. The paper suggests that a substantial work agenda is needed to extend the decentralization process with greater transparency.
This article examines the effect of party composition of government on the centralization of budgeting institutions in Hungary, Poland, the Czech Republic and Bulgaria in 1989-1999, and assesses the impact of the centralization of budgeting institutions on the capacity of these countries to meet the fiscal deficit requirement for the European Economic and Monetary Union (EMU) membership. The article finds that centralization of budgeting institutions through delegation to a strong finance minister and/or prime minister is likely to occur in one-party governments or coalition governments composed of parties which expect to fight repeated elections together, with effective punishment mechanisms. The article finds that countries with centralized budgeting institutions are likely to be more capable of meeting the EMU deficit requirement than countries with decentralized institutions.
Decentralization of government with property tax financing is the standard recipe for public sector reform. Fiscal competition is assumed to stimulate efficiency and hold down the tax level. Property taxation offers additional incentives for efficiency. We study the incentive mechanisms involved using data for decentralized governments and in a setting where they can choose to have property taxation or not. The empirical analysis addresses whether fiscal competition and political control problems influence the choice of having property taxation. The results indicate that both incentive mechanisms are relevant and consequently support the standard advice. Fiscal competition generates a distinct geographic pattern in local taxation and political fragmentation seems to motivate property taxation to control common pool problems. The main methodological challenge handled concerns spatial interaction with discrete choice.
Twelve years into the implementation of the Local Government Code of 1991, it is but opportune to assess how the key features of this landmark legislation has contributed to (or detracted from) achieving the balance between local autonomy and accountability. The literature on fiscal decentralization suggests that these two goals are not incompatible. In fact, real autonomy (in the sense of subnational governments being able to link their spending decisions with their revenue/tax decisions) promotes fiscal responsibility. In the context of the ongoing debate in the Philippines, however, local autonomy has been equated (by many LGUs officials) with the independence of LGUs from central government interference. As such, LGU officials have focused more on securing even higher levels of block grants in order to address the widely perceived vertical fiscal imbalance. However, closer scrutiny of the problem indicates that greater tax decentralization, coupled with a well-designed intergovernmental transfer system that includes elements of fiscal equalization and categorical grants conditional on the achievement of minimum service standards, would better enhance the gains that are forthcoming from the decentralization process while minimizing the risks of macro-instability.
By employing the methodology developed by the OECD the paper assesses the degree of revenue decentralization in Russia in comparison with other post-communist European countries. The paper provides theoretical arguments underpinning fiscal decentralization, analyzes the composition of subnational government revenues, the level of regional and local tax autonomy and types of intergovernmental fiscal transfers. The analysis presents the composition of revenues depending on the degree of subnational and local government control. In comparison with other transition countries fiscal decentralization in Russia is relatively low. It is concluded that Russia's public finance reform has not progressed towards providing greater fiscal autonomy for regional and local governments.
For a variety of reasons, many developing countries especially since the 1990s have embarked on programmes of democratic decentralization that are aimed at creating local self-governing systems that are democratic, relatively autonomous and effective in delivering services.Finding independent sources of financing for these emerging, locally based organs of governance has been one of the central challenges that confront these efforts in most countries.The literature suggests that sources of independent local government revenue are few in poor countries.As a result, most countries design decentralization programmes that depend heavily on intergovernmental transfers from national to local governments.Given widespread poverty that exists in most developing countries, this is a crucial strategy.However, the problem is that many central governments are engulfed in a systemic financial crisis and are desperately exploring strategies for reducing their expenditure commitments.One outcome is that revenue transfers are often irregular or fall much below the levels of expenditure decentralization, leading to serious fiscal gaps at the local level.Even where transfers are adequate and reliable, a fiscal regime which compels local actors to depend so heavily on central financial arrangements for practically all of their expenditure requirements undermines the development of lateral (local state-citizen) rather than vertical (central-local state) relations within the state, with serious implications for public participation and effective accountability.In the meantime, cities of developing countries continue to grow phenomenally in a way that makes conventional strategies for financing urban infrastructures unsustainable.Many analysts view this rapid urbanization as fatally aggravating the problem of urban/local governance.This paper suggests a different and more positive view.It reviews the literature which concedes that property taxation remains largely untapped and might indeed be progressive in developing countries.This literature highlights mainly the technical constraints to progress-assessment, valuation and collection.In contrast, this paper contends that the tax suffers from a combination of political and technical factors where the latter are dependent not independent variables.The paper undertakes an analysis of the key stakeholders in implementing successful property taxation policies based on research conducted in four countries-India, Nigeria, Republic of South Africa and Zimbabwe in the early 1990s.The paper suggests that willingness, opportunity and capacity remain critical factors and demonstrates how opposition to the tax can be overcome by strategic partnerships between central and local governments, public and private and domestic and external actors.
As authority over public expenditures has shifted from central to provincial and local governments in countries around the world over the last two decades, prevailing approaches to the study of decentralization in welfare economics and public choice from the 1970s and 1980s have given way to new political economy approaches. The first generation of theories envisioned central and lower-level governments as distinct sovereigns within their own spheres of activity. Recognizing a more complex reality, the political economy literature is rethinking the notion of sovereignty in multi-tiered systems. Motivated by recent difficulties with fiscal decentralization and fiscal discipline, this essay rethinks the notion of fiscal sovereignty, viewing it as an evolving set of beliefs in the context of a dynamic game of incomplete information played between central and subnational governments. Provincial or local governments, along with their creditors and voters, attempt to assess the credibility of the central government's commitment to abide by pre-specified intergovernmental fiscal arrangements. When higher-level governments dominate the field of taxation and take on heavy co-financing obligations—as central governments do in virtually all newly decentralizing countries—the central government's commitment not to bail out subnational governments in the event of debt-servicing crises is not credible. In other words, subnational governments without significant tax autonomy will not be viewed as sovereign borrowers, and this has important implications for their fiscal behavior.
Japan is stuck between lots of rocks and several hard places. It confronts the escalating costs of the world's most rapid pace of ageing with a low and declining birthrate and virtually no support for mass immigration. Moreover, the country faces these costs while severely handicapped by a public debt 1.5 times its GDP plus dramatic declines in the high rate of savings that has hitherto financed it. In addition to all this, the poorly performing economy is in its fourth year of deflation with little hope of producing a recovery in tax revenues. Indeed, deflation and minimal economic growth have eroded national income- tax revenues to their lowest level since the collapse of the bubble economy.
Even in the wake of the most sweeping campaign finance reform law to be enacted in three decades, further significant reform is inevitable. Special interest money continues to flow through loopholes in the Act, and the Presidential Election Campaign Fund is near collapse. The next reform should encourage broader participation in the political process by individual citizens, both to dilute the power of special interests and to serve independent democratic values that recent Supreme Court jurisprudence has identified as vital to meaningful reform. We propose adopting a refundable tax credit of $100/taxpayer for political contributions to federal candidates and national parties; the credit would be targeted to lowerand middle-income Americans. A refundable tax credit is equivalent to giving each eligible citizen up to $100 annually to use for political contributions. We also present data about the relative importance of political contributions by special interests (corporate, labor and other PACs) and individuals that undermine many of the assumptions on which past reform has been based and that have not been discussed in the legal literature. The data clearly show that small contributions by individuals are the dominant source of money in campaigns, and that the influence of special interest money is subtle, appearing to “purchase” benefits like access, a place on the agenda, and minor policy details. Working from an accurate picture of who really pays for politics, and drawing from the experience at the federal and state levels with similar tax refund programs, we present the tax credit as a reform that is simple, easy to administer, and likely to improve political participation by average Americans. Thus, our proposal, unlike the complicated voucher plan with anonymity put forward by Ackerman and Ayres, is likely to be adopted by Congress; moreover, it will appeal to a bipartisan consensus because it mixes public funding with a decentralized allocation mechanism using a tax subsidy.
Fiscal federalism implies a challenge of holding fiscal discipline at the local level. Recent analyses of fiscal adjustment have addressed the design of fiscal and political institutions for the U.S. states, and have shown how tax limits and anti-deficit rules strengthen immediate shock adjustment. Here we extend the evidence to the case of centralized financing in Norway. In this system central government takes a larger responsibility in smoothing decentralized government revenue, but at the same time the localities are more vulnerable to shocks because of their limited room to maneuver. The empirical analysis of responses to budgetary shocks shows that local public investment is the main shock absorber in this system and that investments are procyclical. Local fiscal crisis is avoided, but decentralized government is destabilizing.
Twelve years into the implementation of the Local Government Code of 1991, it is but opportune to assess how the key features of this landmark legislation has contributed to (or detracted from) achieving the balance between local autonomy and accountability. The literature on fiscal decentralization suggests that these two goals are not incompatible. In fact, real autonomy (in the sense of subnational governments being able to link their spending decisions with their revenue/tax decisions) promotes fiscal responsibility. In the context of the ongoing debate in the Philippines, however, local autonomy has been equated (by many LGUs officials) with the independence of LGUs from central government interference. As such, LGU officials have focused more on securing even higher levels of block grants in order to address the widely perceived vertical fiscal imbalance. However, closer scrutiny of the problem indicates that greater_x000D_ tax decentralization coupled with a well designed intergovernmental transfer system that includes elements of fiscal equalization and categorical grants conditional on the achievement of minimum service standards would better enhance the gains that are forthcoming from the decentralization process while minimizing the risks of macroinstability.