RESUMEN El desarrollo del modelo de descentralización fiscal español ha atravesado desde su inicio por diversas vicisitudes, de las cuales las últimas han ido siempre en la línea de incrementar la corresponsabilidad fiscal de los gobiernos subcentrales, bajo la hipótesis de que este incremento y la consiguiente mejora en la aplicación del principio de equivalencia por parte de los gobiernos tiende a mejorar la eficiencia en la asignación del gasto público. En este artículo se analizan las principales novedades de la reciente reforma del sistema de financiación local haciendo especial hincapié en sus efectos esperados sobre la corresponsabilidad fiscal. Las conclusiones alcanzadas son ambiguas en este sentido, por cuanto la práctica desaparición del IAE para muchos ayuntamientos y los efectos inciertos de la reforma sobre el indicador de esfuerzo fiscal apuntan en la dirección de menor corresponsabilidad fiscal, mientras que la ampliación de los topes máximos de tributación para la mayoría de municipios y la mayor discrecionalidad a la hora de establecer bonificaciones por razones diversas pudieran operar en sentido contrario. En todo caso, se apuntan graves deficiencias técnicas al nuevo modelo y se cuestiona seriamente la equidad y la eficiencia del nuevo modelo de transferencias, cuyo hito principal (la nueva participación en impuestos individualizados para los municipios de mayor dimensión) en modo alguno incrementa la corresponsabilidad fiscal. ABSTRACT The development of Spanish fiscal decentralization model has always aimed to increase the fiscal responsibility of sub-central governments, by hoping that the advances in the principle of equivalence tend to improve the efficiency of public expenditure. In this article the main novelties introduced by the recent reform of local financing system are analyzed, by focusing specially on their expected effects on fiscal responsibility. The conclusions are ambiguous. The eventual suppression of the Business Tax in many councils and the uncertain effects on the fiscal effort index seem to decrease fiscal responsibility. However, the higher availability to allocate reductions in local taxes and the faculty to reach higher rates in those taxes could have the opposite effects. Anyway, important technical deficiencies in the new model are pointed out and equity and efficiency of the new grants system are seriously questioned. Concretely, the main reform by including for the higher municipalities a new share on concrete central taxes (Income Tax, Value Added Tax, ...) does not increase at all fiscal responsibility.
Konstantin Sonin, Centre for Economic Policy Research (United Kingdom)
In a federal state, political leaders of constituent units might protect their enterprises from the federal center (e.g., allowing them not to pay federal taxes). The effectiveness of such protection depends crucially on the ability of local authorities to extract rents from enterprises. They can easily do so, if there are a small number of enterprises with large employment, and local monopolies can be effectively sustained. They cannot do it so easily if regional industry is competitive, political opposition is strong, and the federal center has enough means to enforce payment of taxes. We build a simple model to argue that it is the industrial structure of constituent units that determines political relations between them and the federal centre. The theory is supported by the recent experience of Russia, China, and Argentina.
This paper assesses the impact on local government budget of the rearrangement of central-local fiscal relationship under proposal in Japan, or the so-called Trinity Reform, where it is proposed that some of the tax base be handed from the central to the local governments, in conjunction with drastic cut in both transfer of the tax revenue and a collection of subsidies. The tool used for this objective is the Nagoya City University Econometric Model (NCUEi 2003) whose core system has been duly modified to simulate proposals, and also to investigate the performance of the local economy under the strain of declining and aging population. The object case taken up in this paper is Nagoya City.The model is characterized by the market adjustment of the regional total demandsupply balance, where the age distribution of the population is incorporated so as to assess the impact of the demographic change both on the total demand and productive capacity. The forecast and simulations show that while the abovementioned Reform generates persistent unfavorable impact to the local government, the dominant negative impact comes from the demographic change, in terms of the primary balance of Nagoya City. Unless proper measures are to be taken, the simulations indicate, the local government's fiscal soundness will hardly be maintained under the two major pressures, one from the fiscal decentralization as represented in the subsidy cut-cum-tax base transfer and the other from the demographic change. The simulation of the abovementioned reform reveals that it definitely worsens the primary balance of the locality, and implies that practically an additional transfer of consumption tax must accompany this reform, even for one of the most favorable localities like Nagoya where its major industrial sectors, or the automobile-industry-led industries in this case, are steadily growing. The implication will be obvious for localities where economy is less favorable.
Juan C. Chaparro, Michael Smart, Juan Gonzola Zapata
For the past fifteen years, Colombia has been engaged in a grand experiment in decentralization. Since 1986, subnational government spending has increased dramatically, as the regions have assumed greater control of health and education programs and other local services, and an increasing fraction of national revenues have been earmarked for transfer to lower-level governments. This paper examines fiscal data for a large number of Colombian municipalities for the 1985-99 period. Our first goal is to describe the effects of the transfer system on horizontal balance among municipalities. By our estimates, the fiscal capacities of Colombian municipalities differ substantially, which is a major challenge to designing an effective system of decentralization. Our second goal is to draw some inferences from the data about how the current system of transfers has affected the level of local taxation and spending, and the pattern of spending across functional categories. Our data cover a period that straddles the major reform in the allocation of municipal transfers that resulted from Law 60 in 1993. This permits a more accurate assessment of the effects of transfers than has been possible in previous research.
Two developments flowing from the institutional reforms in The Netherlands of the 1980s currently form ‘the usual suspects’ in a series of scandals or instances of public arousal within the public sector. The first factor is the large-scale decentralization of tasks from central government to provincial and municipal authorities. Initiated under the name of democratization and efficiency this decentralization programme was part of a large package of operations, including deconcentration, deregulation, privatization, and reconsideration, that were to to slim down central government in terms of personnel, tasks and organization. Second, managerialism, i.e. the adoption of business management ideas and concepts by public administrators, entered Dutch public service vocabulary during the second half of the 1980s. Managerialism did not limit itself only to central government agencies but also — and perhaps more succinctly — found openings in provincial and municipal authorities, mainly as a fierce reaction against the ‘bureaucratism’ of daily administrative practice to counter the relative deprivation perceived by civil servants in relation to their private sector counterparts. This article shows that the decentralization of financial management and the emergence of ‘reinvention’ ideas have had autonomous but drastic effects. While the former blinded central government and provincial controllers, the latter legitimized practices that even under a private sector regime would have been deemed improbable.
Decentralization is commonly championed as a means for achieving equity. To date, however, there has been little discussion of the mechanisms underlying this relationship, and several of the few empirical investigations that have addressed the topic have found the converse; that decentralization has exacerbated inequalities. This article examines the performance and equity in financing of the Honduras Ministry of Health's (MOH) decentralized user fee system. The MOH of Honduras established a national user fee policy in 1989. It provided a framework of rules and regulations and decentralized administration of the system to the regional offices. A survey conducted under the auspices of this study provided detailed information about the structures and operations of MOH user fee systems. The survey revealed that the systems vary markedly by region, creating horizontal inequities, and that they have numerous other shortcomings. The average price of a consultation is low, US dollars 0.16, and revenues have consistently equalled just 2% of MOH expenditures. The systems' administrative costs are equal to 67% of their revenues. Eliminating the user fee systems in all but the national and regional hospitals would actually save money and/or enable the MOH to provide more care. Average consultation prices are highest in health posts, intermediate in centres and lowest in the national hospitals, thereby encouraging the inappropriate use of the MOH's pyramidal referral system and fostering MOH inefficiency. Fee levels and exemption practices are horizontally and vertically inequitable. The likelihood of paying for an ambulatory visit is highest at a health post, 89%, and lowest at a hospital, 49%. Individuals from the poorest one-fifth of households are the most likely to have to pay for care. Honduras' experience demonstrates that a decentralized user fee system is not necessarily equitable, and that, more generally, the gains that can be realized from decentralizing user fee systems are not automatic. They must be anticipated, planned for and cultivated by a well-designed and well-implemented initiative that is not a single, one-time event, but rather a dynamic, on-going enterprise.
Most economists agree that new investments in highways at this point in time in the United States have little impact on overall growth in output. New highways play a more important role in shifting economic activities among places, drawing jobs from other locations into the highway corridors, a phenomenon known as negative spillovers. The objective of this dissertation is two-fold, to examine the proposal to decentralize highway finance, which aims to solve the financial responsibility mismatch problem that stems from economic spillovers of highways, and to test the hypothesis of economic spillovers of highway investment at the metropolitan level. First, to better understand how spillovers influence the highway investment decision, the theoretical framework from the interjurisdictional tax competition literature is borrowed to model governments' investment behaviors. Numerical simulations show that decentralized local governments, which independently maximize output in their own jurisdiction, may engage in wasteful investments in highways with the presence of spillovers. Second, to shed more light on the spatial detail of economic spillovers, empirical tests of the spillover hypothesis are conducted at the metropolitan level, with census tracts as the unit of observation. The results of the quasi-experiment reveal census tract employment growth patterns that confirm the existence of negative spillovers caused by the opening of the Interstate 105 in 1993. The benefiting area, which grew substantially after the highway was opened, is limited to a long narrow corridor around the highway, while nearby locations outside the corridor experienced slow growth relative to the rest of the metropolitan area after controlling for various factors. Together, these results suggest that although negative spillovers are present at the metropolitan level, decentralizing highway finance may not be an effective policy to deal with the financial responsibility mismatch problem. Highway finance should remain centralized within metropolitan areas, and regional governing bodies should pay special attention to the distributional impact of highway projects.
This paper reviews the economic rationale for and against decentralization with particular attention to the organization and delivery of education. The paper frames the overview within the standard efficiency-equity trade off and highlights the increasingly important role of incentive mechanisms, accountability, and citizens' participation. The discussion then turns to the issues that are specific to decentralizing education, including the pros and cons of financing schools from local taxes, and a taxonomy and description of institutional arrangements around the world. A brief review of evaluation studies of decentralization reforms in education concludes the paper.
The impact of local government spending on output growth is estimated using a panel of Brazilian municipalities during 1985–1994. Attention is focused on three expenditure categories, housing/urbanization, health/sanitation, and transport services, which are expected to be growth-enhancing, and their sources of finance (local taxes, intergovernmental transfers, and borrowing). The determinants of these spending categories are also examined. The size of the municipality, measured by the resident population, is shown to affect government spending nonlinearly. This is a contribution to the recent empirical literature on the linkages between decentralized government spending, public finances, and economic growth at the local, rather than national, level.
INTRODUCTION Decentralization of government seems to be one of the intellectual darlings of public finance in the 1990s, just as direct consumption-based taxation in its various guises (e.g., the expenditure tax, the tax on consumed income, the flat tax, the X-tax, and the simplified alternative tax) was the darling of the 1980s. More important, many countries are considering decentralization-or have actually embarked on a policy of decentralization. The question of tax assignment-which level of government should tax what in a decentralized system-is an important aspect of the literature of fiscal decentralization. Unfortunately, some of those responsible for decentralization policy, especially in less developed countries (LDCs) and countries in transition from socialism, are not always thinking clearly about issues of tax assignment and are not taking due cognizance of international experience. At best they may make choices that are sub-optimal; at worst, they run the risk of repeating mistakes other countries have made-mistakes transition countries and LDCs can ill afford to make. These risks are aggravated by the fact that the literature is always not clear on some issues.
Bob Searle, Jun Ma, Stefano Piperno, Ehtisham Ahmad
Intergovernmental equalization grants have been described as “the glue that holds a nation together.” Getting the grants system right is critical to countries as they decentralize. This paper illustrates general principles with an example based on Indonesia in 2000. A general grant should be used to supplement own revenues and to finance local service provision where there are no central mandates. The special needs of backward regions would be better provided for by specific grants. Specific grants need to be taken into account in the general grants scheme.
Recent research on federalism is extremely divided. While some tout the benefits of “market-preserving” federalism, others point to the fragmentation and incoherence of policy in federal states. This research bridges the divide by analyzing the political andfiscalstructures that are likely to account for the highly divergent economic experiences of federal systems around die world. To test these propositions, the authors use an original data set to conduct analyses of budget balance and inflation infifteenfederationsaround the world from 1978 through 1996. The empirical research suggests that the level of fiscal decentralization, the nature of intergovernmental finance, and vertical partisan relations all influence macroeconomic outcomes. The find- ings have broad implications for the widespread move toward greater decentralization and for the theoretical literatures on federalism and macroeconomics.
The opening page of this book says that, in recent decades, there has been a ‘substantial increase in the mobility of capital and population between the individual jurisdictions of long‐established federal states (such as Canada, Germany and the USA) and among the formerly independent member countries of the European Union.' It adds that the book will seek to show that the results of this increasing mobility are that fiscal decentralization is essentially beneficial for resource allocation, at least for local public goods, but not for income distribution. It would be apt to start such a book with some data illustrating the ‘substantial increase' in the mobility of population and capital in the places cited. However, the author gives no information for Canada or Germany. For the USA, his data show that inter‐state population mobility has actually fallen since 1970; and while he seems to infer from the falling inter‐regional distribution of incomes in the USA between 1900 and 1990 that capital mobility has increased, this fall might reflect the effects of sustained rather than accelerating migration. For the EU, he accepts that the mobility of labour between member countries is still very low. So the only clear evidence given for increased mobility seems to be that of capital within the EU.
We provide a model incorporating features of local public finance in Japan, including close fiscal ties between different levels of government as well as bureaucratic determinations of intergovernmental transfers. The discretionary nature of transfers softens local budgets ex post, which exerts perverse incentive effects on local governments ex ante. Fiscal decentralization that assigns more revenue responsibility to the local level serves to counteract this moral hazard incentive. The emphasis is on the endogenous nature of regional fiscal capacities at the local level. Fiscal devolution motivates local jurisdictions to become fiscally independent wherever possible.
In the context of the recent democratic transition in Mexico, this dissertation explores the affect that new institutional arrangements have on municipal performance and accountability. The hegemonic one party regime that ruled Mexico for seventy-one years was marked by an extreme centralization of financial and political power that left local governmental functions and responsibilities ill defined and municipal government ill equipped to provide for its citizenry. ^ Decentralization emerged as a widely promoted management strategy for the public sector as a means to reverse the negative policy effects wrought by years of centralized control. In Mexico, the first concrete decentralization reform came with the passage of the Municipal Reform Act of 1983 that granted municipalities the constitutional authority to levy and collect the property tax in order to provide basic services. The Act marks a watershed in Mexico's public finance system by empowering municipalities to garner their own financial resources and in the process a degree of autonomy from federal and state government, historically dominant within Mexico's federalist system. ^ The purpose of this dissertation is to test the decentralization-performance thesis positing that such reforms enable governments to improve their performance. Decentralization reforms are also believed to increase opportunities for citizen participation, which is a more democratic and effective means of targeting service delivery when citizen preferences are taken into account. In the case of Mexico, the decentralization-performance thesis is further refined by testing for the impact of a variety of independent variables on government performance. Direct revenues, the decentralization measure, is found to be the most potent predictor of performance along with other contributing factors such as increased party competition, governance quality and population size. ^ The contribution of this dissertation to the decentralization literature is that instead of a single case study, a more systematic approach testing a representative sample of 300 Mexican municipalities is undertaken. Such a large sample permits a thorough testing of the theory. The results of the study are potentially generalizable to other federalist states in Latin America. ^
Ernesto Rezk, Lucrecia Rodas, María Cecilia Gáname
ADMINISTRACION FISCAL, FINANZAS LOCALES, DESCENTRALIZACION GUBERNAMENTAL, GOBIERNO MUNICIPAL, TRIBUTACION, TAX ADMINISTRATION, LOCAL FINANCE, DECENTRALIZATION IN GOVERNMENT, MUNICIPAL GOVERNMENT, TAXATION
This article shows that the concept of decentralization used in the New Public Management (NPM) discussion is neither applicable to the concept of state decentralization, nor can it be transferred to developing countries. The concept of state decentralization presented here is based on the devolution of competencies, resources and capacities to subnational governments, which supposes a simultaneous, coordinated and interdependent decentralization in the fields of politics, administration and finance in order to develop an efficient decentralization process. In the case of Nicaragua the proposed goal of the NPM strategy, to increase the state's legitimacy through its reduction and rationalization, serves to justify privatization and budget consolidation. The municipalities have far too few resources and capacities at their disposal to successfully carry out their legal competencies. NPM decentralization in Nicaragua has not yet made a decisive contribution to poverty reduction.
Musgravian" externalities, formulated and illustrated by Musgrave in a 1966 paper on "social goods" are seen in this paper as one form of the interactions that occur between the components of a federation.The original formal apparatus is first exposed briefly.In that context, it is then considered whether and how alternative forms of federal structures are likely to achieve efficiency.Following suggestions from the literature, three such forms are dealt with: "planned", "cooperative" and "majority rule" federalisms.Next, the relevance of non cooperative equilibria is examined, in the light of an interpretation of them as "fall back" positions when disagreement occurs among members of a federation.Finally, the question is evoked of what economics and public finance may have to say on the limits to institutional decentralization, i.e. on the choice between federal, confederal and secessional structures.
The Italian general government expenditure is empirically modeled by considering demand-side, supply-side, and institutional factors. The authors estimate a long-run relationship with government expenditure driven by the demand-side and supply-side effects of domestic income and bureaucratic power, respectively, as well as by an institutional factor, namely, the decentralization of public expenditure. The disequilibrium error positively affects income growth and local spending, implying that when government expenditure is above its equilibrium level, both economic growth and local governments benefit. However, tighter government spending within the European Monetary Union environment suggests that local governments will have to become more efficient to find additional resources for their financing.