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.
Chinese local governments have obtained incremental land by continuous city expansion and infrastructure investment, and have consequently acquired large amounts of land granting revenue. Based on a theoretical analysis framework, this paper explains the impact of Chinese style decentralization on local government behavior. Because the fiscal decentralization weakened the decision and distribution right of local government revenue or expenditure, the pressure of the gap between local government revenue and expenditure has grown. This research provides a new perspective for understanding the deviation of land granting prices and will help develop policy to regulate the behavior of local governments. We conducted an analysis using prefecture-level panel data from 1999 to 2009 for the Yangtze River Delta region. The results showed that Chinese style decentralization has significant incentives on the land finance of local governments. Fiscal decentralization was found to have a positive effect on the increase of industrial, commercial and residential land prices; political centralization was found to have a positive effect on commercial and residential land prices. In conclusion, the land finance tendency of local governments and deviations in land granting price have a close relationship with institutional arrangements of Chinese style decentralization.
Abstract This article elaborates on the understanding of New York's public fiscal position. The choice of counting rules has a dramatic impact on the understanding of the size of government and interpretation of its fiscal health. The decentralized character of New York's public fiscal position derives from impacts of policy practices in four key areas: social welfare, education, public employee pensions, and collective bargaining. Debt is both a useful and respected tool of public finance and a dangerous temptation for elected officials. New York is among the most heavily indebted states in the nation. With respect to Medicaid and public assistance, the City of New York and virtually all counties favor increased state financing. The area with the greatest potential for change is the heavy decentralization of public fiscal matters in New York.
Provides an overview of the framework for an analytical method created to provide country studies of Burkina Faso, Ghana, Kenya, and Senegal to address the historical and institutional design of decentralization as outlined in each country's national constitution or legislation through the use of an institutional study and a field study. The six steps in this process assess: (1) the institutional approach to decentralization, its design, and any gaps between the institutional norm and the reality on the ground; (2) the decentralized budget which provides a benchmark for comparing the financing systems of the countries studied; (3) the assignment of responsibilities across levels of government; (4) the revenue structures and systems and financial autonomy of local authorities; (5) the financial transfers through intergovernmental grants to support local governments; and (6) statistical data which can be used to measure the decentralization of responsibilities and resources.
The literature on federalism often evokes an association between redemocratization and decentralization, in which the consolidation of democracy is associated with a strengthening of federalism and a trend towards administrative, political and fiscal decentralization (Souza, 1999). The fact that this is driven by the need to provide resources and supply better-quality public services, makes analysis of the distribution of social spending highly relevant. Accordingly, the aim of this chapter is to analyze the trend of social spending in Latin America. Several Latin American countries have been pursuing an intensive process of fiscal decentralization over the last two decades; and, at the same time, almost the entire region has made changes to its social policies. These two processes reflect, first, the desire to generate allocation efficiency gains, which have an impact on expanding the decision-making, fiscal, and financial autonomy of local governments; and, second, the desire to strengthen democracy. The latter has had repercussions on social policy actions and services, generating broader coverage and higher monetary benefits, together with improved access, expansion of coverage, and the decentralization of jurisdictions and resources for service provision. In some countries, decentralization was seen as a way to resolve institutional problems caused by a loss of resources and the ability of federal governments to finance social policies and restructure service provision, while at the same time adapting to the growing importance of local areas in federative resource sharing and autonomous governance.
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 âfinancing platformsâ 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.
We study the effect of fiscal decentralization on economic growth for twenty-three Organisation for Economic Co-operation and Development countries from 1975 to 2008. In order to proxy fiscal decentralization, we use both traditional Government Finance Statistics (GFS)âstyle measures and new measures that account for the degree of subnational tax autonomy. The regressions with GFSâstyle measures indicate that fiscal decentralization has a negative but statistically insignificant effect on growth. Regressions with the new measures also result in negative coefficient estimates. However, they are larger in absolute terms and statistically significant. For the empirical literature on fiscal federalism, these results imply that measures of fiscal decentralization that account for subnational tax autonomy should be preferred to traditional GFS-style measures. From a policy perspective, we conclude that policy makers should be aware of the economic trade-offs when pursuing reforms toward more fiscal decentralization.
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 worldâs 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.
Abstract Significant developments of US state and local finance are converging in a manner that will newly frame the practices of state and local governance in the next decade and beyond. These trends can move from low-priority âproblems to be addressedâ to becoming urgent, high-priority concerns when the governments face economic and political shocks that are beyond their direct controlâfor example, the Great Recession (2007â2009). In this context, this article offers to bring together in the book the existing knowledge on the principles and practices of state and local finance. It takes an explicit look at how the issues proposed to be addressed fit into the broader framework of the practice of US intergovernmental relations (fiscal decentralization). The organization of the book is explained.
Abstract Several transition economies have undertaken fiscal decentralization reforms over the past two decades along with liberalization, privatization and stabilization reforms. Theory predicts that decentralization may aggravate fiscal imbalances, unless the right incentives are in place to promote fiscal discipline. This study uses a panel of 20 transition countries over 19 years to address a central question of fact: Did privatization help to promote local governmentsâ fiscal discipline? The answer is clearly ânoâ for privatization considered in isolation. However, privatization and subnational fiscal autonomy along with reforms to the banking system â restraining access to soft financing â may prove effective at improving fiscal balances among local governments.
Serdar Yılmaz, François Vaillancourt, Bernard Dafflon
Abstract This article lays out the economists' view of why state and local government matters. To establish the economic framework, the article systematically works through the seminal contributions of Paul Samuelson's theoretical arguments of the importance of a public-sector role for efficiency in resource allocation; Charles Tiebout's thinking on the difference between national and local public goods; Richard Musgrave's classification of the fiscal âbranchesâ of a decentralized federalist system; and Wallace Oates's Decentralization Theorem. It is from this platform that the article proceeds to address three fundamental fiscal policy issues for a multigovernmental society (e.g., US fiscal federalism): the sorting out of expenditure responsibilities among different types of governments (âexpenditure assignmentâ); the question of which type of government should use which type of revenue (ârevenue assignmentâ), and what happens when, for many state and local governments, the costs of the allocation of expenditure responsibilities are greater than that which can be financed from their âownâ state/local revenues (the role of âintergovernmental transfersâ).
The 74 th Constitutional Amendment Act (CAA) enacted in 1993 gave urban local governments constitutional status and aimed to strengthen municipal governance. Municipalities were to be given greater responsibilities in the provision of basic infrastructure and social services and financial power was also to be devolved. Now, seventeen years since the passage of this constitutional amendment, the promise held out by decentralization has remained largely unrealized. In this context, the intention of this paper is to recommend specific policy initiatives for municipal governance reform in India. In drawing up these recommendations, the paper analyses two broad sources, namely the policy environments for local government in post-Apartheid South Africa and post-democracy Brazil. South Africa and Brazil are instructive case studies because they too, like India, are trying to address the issues of widespread poverty and inequality in a democratic framework. Additionally, they are widely recognized as having innovated in many aspects of the policy framework for local government and service delivery. Based on our analysis, we recommend pragmatic changes in aspects of property tax, municipal finance, community involvement and models of service delivery as the levers to improve urban governance and service delivery.
The aim of the paper is to review the economic theory of tax assignment across levels of government and the international experience in the use of direct taxes â personal income taxes and taxes on profits and on business value added â for fiscal decentralization. We highlight that as for other options of local taxation there are merits but also drawbacks in the use of direct taxes as a source of financing for sub-central governments and so the final choice about their use or not is a matter of judgment and depends on the political priority to be attached to different objectives, such as efficiency, equity, accountability, tax competition, administrative feasibility and revenue adequacy.
The 1991 Local Government Code devolved substantial spending, taxing, and borrowing powers to local government units (LGUs). Moving governance closer to the people can generate a welfare gain, but local governments must have adequate revenues to finance local development. The paper examines the current status of the tax-expenditure assignment and the intergovernmental fiscal relations, and identifies areas for reform. There is a need for a clearer and more accountable assignment of expenditure by eliminating particular sections of the code, which serve as a route for national government agencies to be engaged in devolved activities, and for politicians to insert funding for pet projects, which distort local decision making and preferences. There is need as well to review the tax assignment to improve local revenue generation. The allocation of intergovernmental fiscal transfers may be improved by introducing matching grants to improve equalization transfers to local governments, and performance-based grants to motivate greater local revenue mobilization. Without a clear funding source, unfunded mandates imposed on local governments defeat the purpose of the policy objectives set in those mandates. Local government alliances and cooperative undertaking may provide public goods with interjurisdictional spillover benefits. Consolidation, better coordination of local government activities, and resource pooling for better local service delivery are pathways indicated by successful experiences of LGU collaboration.
Abstract The aim of this paper is to better understand the impacts of a decentralized public health delivery system of the Philippines on local government spending. Specifically, it investigates determinants of local government public health expenditures for the year 2007. Within the context of the Philippines' decentralized health system, particular emphasis is given to horizontal fiscal interactions. The research addresses these issues in an empirical spatial econometric framework utilizing public finance local government data. A key finding is the positive fiscal interaction among local governments that is consistent with competition for scarce resources such as doctors, as well as competition among political actors prior to elections. The policy implications of these results are also discussed.
The record of subnational public finance during the 1980s and 1990s in Brazil and Mexico is well known: long periods of disequilibria caused by excessive debt accumulation at the state and municipal level, sometimes exacerbated by sharp currency depreciations but more often because of distorted incentives from central government implicit bailout guarantees, resulting in a series of fiscal crises and calling into question state performance at all levels of government in managing subnational fiscal policy. During the 1990s, however, piecemeal decentralization reforms were being pursued by fiscal policy makers, introducing new rules and regulations, including quantitative targets and market-based reforms, which laid the groundwork for putting subnational finances on a better footing during the 2000s. The politics of these reforms and the subnational fiscal stability achieved during the regional growth cycle of the previous decade have diverted attention away from the relationship between local public finance and external economic volatility.1 Given the nature of the transmission of the recent global economic crisis and the continuing deficit of global economic regulation, this seems to be a particularly salient field of inquiry. Recent literature on fiscal federalism, the so-called second generation, provides a basis for developing a loose analytical framework in which the Latin American experience of the previous decade can be considered. This literature extends the early normative models of fiscal frameworks constructed on assumptions of economic efficiency and willingness of public sector agents to identify market failures in the provision of collective goods, emphasizing the political, institutional and historical context in which the assignment of fiscal responsibilities occurs (Weingast 2009; Oates 2005). This approach is particularly suitable in the case of Latin America, not just because there is evidence of political patronage in the distribution of intergovernmental transfers (Timmons and Broid 2010), but because, in more general terms, fiscal decentralization has occurred during a period in which the state has made a clear reentrance in the areas of economic and social policy. Institutions, it would appear, are back in the picture â subnational included. Because this chapter is concerned with analyzing the operational resiliency of urban public finance during and after the recession in Brazil and Mexico, it is important to begin with an accurate model of the subnational features of the fiscal federal systems as they existed in the region at the onset of the global financial crisis in 2008. For the purpose of our analysis, we can divide the municipal finance system into two inter-related tracks: politico-institutional and economic. Fiscal autonomy at the subnational level entails a certain accounting identity: local governments raise revenues from assigned tax bases, receive intergovernmental transfers, make expenditures and incur debt. However, the rules, both constitutional and budgetary (de jure), that define the accounting identity and norms of practice (de facto) that guide the fiscal behavior of subnational governments are determined by the nature and quality of political governance(Tommasi et al. 2001).2 The evolution of these rules and norms determines the effective distribution of spending assignments and revenue authority at the local level. The structure and distribution of fiscal responsibilities delineates the sensitivities of local governments to fluctuating economic conditions. Following a period of repeated fiscal crises in the 1990s, many with origins in excessive debt accumulation at the subnational level, the politico-institutional environment in which subnational governments manage their budgets in Latin America has been reshaped by the adoption of fiscal responsibility laws and subnational fiscal rules but also by continued dependence, with some reforms, on financial market regulations (Webb 2004). In principle, a number of benefits are derived from the implementation of fiscal responsibility legislation. It is argued that rules-based regulation makes subnational budgetary institutions more transparent, smoothing government expenditures over voting cycles, minimizing central government exposure to excessive subnational debt, and ensuring the sustainability of local service provision. In short, the intended effect is coordinated fiscal discipline across subnational government units. In practice, the efficacy of fiscal responsibility legislation is dependent, in part, on design, but also on implementation. That is, even though rules-based legislation to maintain fiscal balance at the subnational level might exist, if effective enforcement mechanisms are not in place, national governments face considerable levels of moral hazard from subnational governments operating under soft budget constraints (Ter-Minassian 2007).3
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.