Both theory and experience in a variety of circumstances around the world suggest strongly that if fiscal decentralization is to produce sustainable net benefits in developing countries, subnational governments require much more real taxing power than they now have. Students of public finance have studied the subject, and practitioners in developing countries have installed many different versions of subnational government tax. In most developing countries there are potentially sound and productive taxes that subnational governments could use: personal income tax surcharges, property taxes, taxes on the use of motor vehicles, payroll taxes, and even subnational valueâadded taxes and local âbusiness valueâ taxes may all be viable options in particular countries. Still, there is no general consensus about what works and what does not. In this review paper, we try and pull together enough evidence to suggest the way forward. We also develop the argument that given political realities one cannot usually decentralize significant revenues to subnational governments without having in place an intergovernmental transfer system to offset at least some of the disequalizing effects that would otherwise occur. Nor does it make sense to think of decentralizing exactly the same package of tax choices to all subnational governments regardless of their scale and scope of operations.
Abstract The Canadian province of British Columbia has been widely recognized as the North American leader in employing Design, Build, Finance Operate publicâprivate partnerships to create new public infrastructure. Canada is one of the most decentralized federations in the world. Provinces exercise considerable autonomy and have powerful revenue raising power at their disposal. Although Canadian local governments are generally seen as substantially inferior to the two senior levels of government, those in British Columbia have in fact managed to achieve quite a bit of autonomy due to non-constitutional factors. Large infrastructure projects, for which municipalities and other local government agencies must look to the province for financial support are among the most controversial of issues within the provincialâlocal government relationship. The introduction of publicâprivate partnerships represents a classic example of a political entrepreneur changing the rules of the game to favour their desired outcomes. In this case, a government leader determined to pursue an infrastructure program that the province lacked the capital to support and the re-structuring of the state along New Public Management lines. However, even though the rule change favoured the Premier's immediate goals, and allowed him to over-ride much local objection, it can be argued that in the long run neither local governments nor the province have necessarily gained in power by changing the rules of the game. In keeping with the general tenants of the New Public Management, the introduction of publicâprivate partnerships has given precedence to technocratic forms of knowledge, especially those involved with finance and accounting, with the aim of pursuing public goals in the most âeconomically efficientâ manner possible. The flip side is that democratic input is strictly limited to the initial question as to whether or not a project is desirable, not how it can be best achieved or whether, once underway, it still represents a wise move. As a result, if there are any real winners in terms of autonomy, it has been senior public managers at both the provincial and local level and their financial and accounting advisors. These actors have had the range of issues for which they are accountable markedly simplified when it comes to major infrastructure projects, even as the complexity of such projects are increased by the use of publicâprivate partnerships. Evidence is drawn from government documents, news accounts and interviews conducted by the author with senior managers, politicians and appointed board members of local government organizations (a quasi-governmental agency and a regional municipality's transit authority) as well as a provincial ministry, which acts as a control case. By employing three cases within the same province and the same time-frame, many of the contextual factors that can confound a study of this sort have been held constant for the purpose of comparison.
:This paper aims to show how state intervention within the European Monetary Union can have positive effects not only on growth but also on public balances and debt. The relation between centralized monetary policy and decentralized fiscal policy partly solves the lack of coordination between the two. Each time a fiscal expansion in an EU country is not accompanied by a Central Bank interest rate increase, the expansionary effect of public spending, initially financed through the emission of public bonds, will be reinforced by endogenous money creation due to the increase in growth. The final result, if growth exceeds the rate of interest, is not only an increase in equilibrium income, but also a reduction in debt.
This book analyzes political decentralization and fiscal federalism in Canada and Germany, both traditional federal countries, and in Spain, a unitarian country engaged in the last two decades in a process of decentralization. Three key issues required for a well designed financing system are analyzed in depth, namely: tax assignment, equalization grants â i.e. redistribution of money from the wealthy regions or the national government to poorer regions, and the role of local governments in the administration of taxes.
The Czech Republic and Slovakia, like other transition countries in Central and Eastern Europe, have given significant lip service to fiscal decentralization and engaged in public administration reforms. But the subnational governments of their public finance systems still lack relative autonomy, which could be addressed partly through developing independent revenue sources for their municipalities and regions. Currently, such independent revenue sources include the proceeds of a strictly nominal property tax as well as those of a small set of local user fees and taxes designed and approved by the central governments. Together they represent only about 5 percent of total municipal budget revenues. A number of market democracies have used user fees dramatically to generate revenues for local governments, a possibility that remains undiscovered in the Czech Republic and Slovakia. User fees could potentially generate badly needed revenue for the municipal and regional governments of the twin republics. The user fees and taxes currently available to the local governments of the two republics are reviewed, primarily to demonstrate their current, very limited use. The revenue implications of current fees are also addressed, revealing them as little more than nuisance fees. A discussion on the growing significance of user fees globally and their potential for the Czech Republic and Slovakia suggests the possibility for heavier use. Particular attention is paid to the question of charging user fees not only for cost recovery, but to provide some budgetary relief for hard-pressed local authorities in economic transition. A basic theory of optimal, revenue-enhancing user fees is presented.
The 20th century has been called the era of centralized authoritarian rule.On the other hand, the 21st century is known as the era of devolution.In this lecture, I will first explain the reasons why a decentralized society, that is, devolution, has become necessary.Second, I will give a general outline on the OECD system of fiscal relations across government levels.Third, I will examine the present state of the reform for decentralization that has been undertaken in Japan in recent years, and fourth, I will investigate the situation of local government finance in the age of devolution in reference to the principles of the European Charter of Local Self-Government.
One of the most fascinating advancements in public economics in the past decade is the emergence of second generation of decentralization.Not like the early generation following Charles Tiebout in 1956,the new development of federalism focuses not on public finance,but on the role of incentives and behavior of local officials in preserving the markets,enhancing regional competition and fostering economic growth.In the context of evolution of central-local relationship in China,and of decentralization during post-1978 era,this paper attempts to construct a Chinese story of economic transition and growth by tracing and outlining the theoretical and empirical elaboration of fiscal decentralization,Chinese style.
INTRODUCTION American state and local governmental fiscal institutions present a contrast. Many scholars regard these institutions as dysfunctional: balanced-budget provisions do not produce balanced budgets; debt restrictions do not restrict debt issue; tax and expenditure limitations limit neither taxes nor expenditures; and budget stabilization funds fail to provide budget stabilization. Richard Briffault, for example, concludes âstate constitutional debt restrictions have been circumvented by new and creative financing devices that tend to drive up the cost of borrowing, encourage the fragmentation of state governments, and facilitate the evasion of balanced budget requirements.â In contrast, American state and local governments are quite responsible by any reasonable measure of fiscal probity. They borrow large amounts of funds and rarely fail to service or repay their debts. The vast majority of state and local debt is issued to finance infrastructure investments, and American infrastructure is in many respects the best in the world. The decentralized structure of American government, while far from perfect, often is held up as a system of how to constrain the powers of government through the institutional mechanism of federalism. We resolve the apparent contradiction of these two views by looking deeper into the effect of fiscal rules on the structure of American governments. The structure of American state and local governments has changed frequently, if episodically, since 1776. We argue that scholars have failed to appreciate the degree to which fiscal issues have shaped the structure of American state and local government.
As Chinese public finance reform deepening,Chinese rural public goods supply gradually form some new features in practice: one of the main supply,the main responsibility for decentralization,the management system of separation of powers,regional inequalities magnification,the supply of investment loss production of public goods and transfer the burden of the future,to further improve and enhance rural public goods supply level,we should strengthen the building of systems,and active input from the decision-making and performance management,and other important aspects,to promote China's rural public goods supply innovative institutional mechanisms.
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.
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 citiesâboth on the revenue and expenditure sideâpresent 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.
To a great extent, there exists similarity in the cause,content and primary result of both the reform of public finance decentralization and the reform of stateâowned enterprises in our country. The reform of stateâowned enterprises has been accomplished completely,however,the reform of public finance decentralization has undergone a setback,which is characterized by the enhancement of central public finance concentration. Through comparison and analysis,the author makes a theoretical explanations of the cause of this phenomenon and makes an empirical test.
The Czech Republic and Slovakia, like other transition countries in Central and Eastern Europe, have given significant lip service to fiscal decentralization and engaged in public administration reforms. But the subnational governments of their public finance systems still lack relative autonomy, which could be addressed partly through developing independent revenue sources for their municipalities and regions. Currently, such independent revenue sources include the proceeds of a strictly nominal property tax as well as those of a small set of local user fees and taxes designed and approved by the central governments. Together they represent only about 5 percent of total municipal budget revenues.
Fei Yuan, Ran Tao, Zhigang Xu, Mingxing Liu · 6 authors
Based on the theoretical literature of fiscal decentralization, we discuss the political economy of inter-governmental fiscal arrangements in China and examine how a transfer-based decentralization impacts on local public employment. A theoretical model is built to show that compared to their counterparts in better-endowed localities, local governments in worse-endowed localities that are more heavily dependent on upper level fiscal transfers to finance their spending have higher incentives to increase public employment to build local political support rather than invest in growth-promoting public goods. Using a county-level panel data set from 1994 to 2003, we empirically identify the causality from higher transfer dependency to the expansion of public employment with an instrumental variable approach. It is argued that under a governance regime in which local governments are more accountable to the upper level than to local constituency, transfer-based decentralization, either through general-purpose transfer or through earmarked transfer, would both lead to serious problems. The policy implication is that expenditure decentralization needs to be accompanied by both revenue and political decentralization to achieve better local governance outcomes.
Paul Berg-Dick, Michel Carreau, Deanne Field, Mireille Ethier
This book analyzes political decentralization and fiscal federalism in Canada and Germany, both traditional federal countries, and in Spain, a unitarian country engaged in the last two decades in a process of decentralization. Three key issues required for a well designed financing system are analyzed in depth, namely: tax assignment, equalization grants â i.e. redistribution of money from the wealthy regions or the national government to poorer regions, and the role of local governments in the administration of taxes.
This paper covers network investment problems under decentralized control of regulation, infrastructure ownership and management. The model features two countries managing domestic infrastructures, used simultaneously for downstream international service provision. Initially, the welfare losses from non-cooperative investment financing policy and access pricing are derived. The impact of strategic interaction between the countries' access prices on the choice of financing policy is investigated. Under strict budget balancing, there are no incentives for efficiency improving investments. Further, investment coordination is shown useless in the absence of regulatory coordination. Illustrations from European network regulation policy for energy and rail are presented.
The Government of Ghana introduced the decentralization concept in 1988 as part of hereffort/determination to make local government administration autonomous in Ghana. Themain aim of the concept was to make the people at the grassroots part of the decision makingprocess with the view to ensuring total socio-economic transformation of the country. Untilthen, decentralization was not a new phenomenon in the politics of Ghana, however, it hassince 1988, assumed a new dimension. New structures and institutions such as the NationalDevelopment Planning Commission (NDPC), and the District Assemblies Common Fund(DACF) were established by law. These structures and institutions sought to transfer means,skills, power and competence to the districts. The DACF is believed to be the majorinnovation under the reform. The fund, which constitutes five percent of the National Income(NI), is disbursed by the central government to the districts through the Office of the CommonFund Administrator. In addition, each DA is required to generate revenues from local sourcesreferred to as Internally Generated Fund (IGF) to supplement the DACF to carry out socioeconomicdevelopment of the local areas.It is against this background that, this study was carried out to describe and explain theimplementation process of the Fiscal Decentralization Policy in the Akuapem South Districtof Ghana. The study set out to describe the assumption that inadequate bureaucratic resources,lack of political resources, poor economic and social resource and lack of inter-governmentalcommunication and enforcement agency may impede effective implementation of the fiscaldecentralization policy in the district. The Mixed method approach of social science researchand a case study approach were used in the study. Interviews and questionnaires were used tosolicit data for the study.The research found out among things that the fiscal decentralization policy is underway.However, the ability and capabilities of the DAs implement the policy is affected by variousseveral factors namely bureaucratic resource such as technical, managerial and financialresource; political resource which implies the acceptance by the bureaucrats of the policy;economic and social resource such as the social condition prevailing at the time of theimplementation; and the inter-organizational communication and enforcement agencieswhich refers to the relationship between the policy makers and the implementers. The studyconcludes that for effective implementation of fiscal decentralization in Ghana there is theneed to provide the necessary resources intended for the policy.2The study seeks to investigate the implementation of the fiscal decentralization policy in theAkuapem South District of Ghana. It aims to highlight some of the challenges confrontingthe district in the implementation of the policy and the strategies being employed to meetthese challenges.
Introduction When scholars talks about local government (LG in continuation), they often point to three basic values that the structures of LG may fulfill (Sharpe, 1973; Stewart, Greenwood, 1995): a) autonomy; because the existence of LG prevents over-concentration of political power and allows for different political choices in different localities, b) democracy; because LG encourages the active involvement of citizens in self-governance; c) effectiveness; because LG is efficient structure for delivery of services tailored to varying needs of localities. With decentralization, decision makers are closer to the results of their decisions, which is helpful in predicting the effects of decisions to be made and in turn supports effective allocation of resources. LG enables a better match of policies with local conditions and preferences. This supports effectiveness both objectively and subjectively (policies are closer to voters' preferences) and variation in solutions promotes innovation and diffusion of positive examples. LG is a feature of all EU states, despite many differences between them. Its importance has been strengthened by the adoption of the subsidiary principle in the Maastricht Treaty and by the EU Charter of LG. Criteria for Expenditure and Revenue Assignment The principles discussed below are among the basic foundations of the fiscal federalism model. As Rattso (2002) notes, model is based on four key assumptions: a) LG is mostly responsible for the delivery of public goods; b) the base for local finance is provided by local taxes (those who pay also benefit), c) there is considerable social mobility; d) in the case of local services, the catchments area is close to the area of administrative jurisdiction, i.e., spillover effects are minimal. The main principles of a decentralized system of public finance recommended by fiscal federalism theory are (Musgrave, 1957; Oates, 1972; King, 1984): a) the division of functions between central and LG is based on the subsidiary principle, which involves a considerable amount of fiscal and functional decentralization. (LG spending to national GDP, although this measure creates several methodological and data problems), b) The allocation of functions takes into account the specific territorial organization. If the structure is to diversified, with many, small units, the functional decentralization cannot be broad. Small units will not be able to perform functions effectively, c) The golden of the balanced budget (Damon, 2002) is enforced by regulations. In short, the rule states that current spending should be financed exclusively from current revenues, while capital investment expenditures are financed from capital receipts, d) The system of local finance is transparent for citizens and LG has an autonomy to form the structure of local expenditures. The most general classification of resources consists of three major categories: a) Own revenues of LG (revenues allocated to LG unconditionally and for an undefined period and that LG has at least some discretion to decide upon these categories of revenue, b) transfers from the central budget in form of grants, c) borrowed resources, d) shared revenues. (1) The model of local finance should conform to the following criteria: a) vertical allocation of resources should reflect the allocation of functions, b) a large proportion of local revenues should come from own sources, because this supports accountability, stimulates councillors and increases citizens interest in local activities, c) equalization system which ensures that each unit is able to provide at least a minimal set of standard services (Buchanan et al., 1999). Principles of Local Taxation There are various candidates for local taxes, and several criteria to help us choose appropriate mix for the country. Some of them are identical with requirements for good taxes in general, but others are specific to LG. âŠ
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 book is divided into two parts. The \n first part macro federalism provides a fresh look at \n emerging constitutional challenges arising from \n globalization and the information revolution, as well as the \n dynamic-efficiency and growth implications of existing \n federal constitutions. Several aspects of these systems are \n examined: (a) institutional design to achieve internal \n economic union; (b) policies for regional development; (c) \n conduct of monetary policy; (d) coordination of fiscal \n policies, with a special emphasis on tax harmonization; and \n (e) management of risks of insolvency from sub-national \n borrowing. The second part of the book local finance \n provides a comparative perspective on local finances and \n measures the progress of decentralized governance reforms in \n developing countries.
We consider the regulation of national firms in a common market. Regulators can influence the production of national firms but they incur in a positive cost of public funds. First, we show that market integration is welfare improving if and only if the efficiency gains compensate for the negative public finance effect (related to business stealing). We also show that supranational competition can have very different consequences on the rent seeking behaviour of firms, depending on cost correlation and ex-ante technological risk. Finally, we characterize the global optimum and show how it can be sustained in a decentralized bargaining solution.
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.