The Indonesian authorities are exploring options for the establishment of subnational government endowment funds and the Ministry of Finance (MoF) has drafted regulations in that context. However, the motivations and objective for establishing an endowment fund at the subnational level diverge across various stakeholders. Clarity of the objectives and purpose of the endowment fund will be critical for informing features of its architecture, and the endowment fund should be aligned with the national fiscal policy objectives. Establishing such funds at a time of fiscal deficit entails a “borrowing-to-save” approach which is not optimal from a fiscal policy perspective. Currently, there is a misalignment between the design of inflow and outflow rules, the endowment fund’s objectives, and the fiscal/economic context. In addition, the current draft MoF regulations restrict the investment policy to conform with the law on decentralization enacted in 2022. This report emphasizes that regardless of the structure of the endowment fund, it needs to be fully integrated within the budget. The report also provides recommendations on assessing the full cost of the subnational government endowment fund, its design and implementation, and provides suggestions to improve the draft MoF regulations.
Compared to the national level, the local government level in Hungary is more responsive to reform efforts. The Hungarian experience indicates that decentralization is a key programme of the transition process for the emerging democracies of eastern Europe. These experiences also show that the decentralization process will be efficient and effective only if three key requirements are met. These are: (1) a stable and democratic constitutional, legal background; (2) an efficient municipal finance system; and (3) a well-functioning local administration.
Local Government Finance and Decentralization
Hungarian Social, Economic and Educational Studies
There are some competition in our current system, such as the tax competition between central governmentand local governments; tax competition among the local governments and the tax competition in the government. There-fore, some suggestions are put forward to here, perfecting the reform of sub -- tax system, regulating the behavior of thelocal government, controling the struggle about the tax resources in the inner government.
Fernando Filgueira, Herman Kamil, Fernando Lorenzo, Juan Andrés Moraes · 5 authors
This paper analyzes the reasons behind Central Government (CG) bailouts of Subnational Governments (SNGs) in the case of Uruguay. We argued that Uruguay represents a good example of the risks of fiscal decentralization, in the context of adjustment policies, and when SNGs` responsibilities and resources have not been carefully defined. We show that, in unitary countries where SNGs lack the opportunities to misbehave that they have in federal countries (e. g. , public debt issuance, international borrowing), SNG officials find ways to finance deficits through non-compliance with politically contestable obligations. In particular, SNGs in Uruguay finance their deficits by accumulating debts with other government agencies and obtaining discretionary transfers from the CG. Through statistical analyses we show that debts and deficits are mainly related to vertical fiscal imbalances and economic conditions in the SN jurisdictions. Yet, the analysis of recent bailout episodes suggests that institutions and political factors play a role (i. e. , they are important ex-post factors). This implies that bailouts have been more than simple compensations for structural imbalances, thus creating opportunities for strategic behavior on the part of SNG authorities (partly confirmed by the disparate fiscal performance of Montevideo vis-à-vis the rest of the country).
Fiscal decentralization reform, the reform of fiscal relations between different levels of government, is an important fiscal policy issue in many African countries. While for many African nations the decentralized delivery of government goods and services is a relatively new concept, the issue of intergovernmental fiscal relations has been a constant and important fiscal policy consideration in Nigeria since the country's independence in 1960. Despite Nigeria's long history with a federal government structure, until recently it was hard to truly consider Nigeria as an effectively decentralized country. For much of the country's history, successive military regimes dismissed elected officials and legislative bodies at all levels of government and replaced them with military appointees; since under military rule subnational governments in Nigeria were accountable to the country's military authorities rather than to state or local electorates, we cannot properly speak of political and fiscal decentralization during this period. Nonetheless, in many respects Nigeria's basic decentralized federal administrative structure was maintained by successive military regimes. Under military rule, state and local governments continued to operate as distinct government units, provide important government services, collecting own source revenues and receiving intergovernmental transfers, albeit at the direction of military governors and appointed local executives rather than at the discretion of the local electorate. However, with the return of civilian rule to Nigeria in 1999, which entailed the adoption of a new constitution and the election of government officials and legislative assemblies at all levels of government, Nigeria instantaneously became one of the most decentralized countries in Africa.To this effect, this paper presents a broad overview of intergovernmental fiscal relations in Nigeria. This paper follows the main conceptual building blocks or pillars of fiscal decentralization and subnational publc finance. After a brief overview of Nigeria's federal system, Section 2 discusses the assignment of functional responsibilities in Nigeria's federal system. Section 3 presents an analysis of revenue assignments, considering what revenue sources are available to each level of government. Section 4 looks at the design and implementation of Nigeria's system of intergovernmental transfers. Section 5 considers subnational fiscal management issues, including the importance of capital "development" budgets in the Nigerian budget process. Finally, Section 6 considers the role and status of local governments and state-local government relations.
The decentralisation of educational administration in Indonesia has recently been the focus of much interest throughout the Asia-Pacific region. With its massive population and multi-ethnic social background, Indonesia serves as an interesting example when considering the real impact of decentralized systems on the financing of Junior Secondary Education in developing countries. In this paper, first, the decentralisation scheme and the current financial budgeting system at the school level of junior secondary education in Indonesia are outlined. Second, a quantitative analysis of the unit cost among provinces, districts and schools is detailed. Finally, policy tasks for the further development of decentralised administration will be identified. Even under the former centralised regime, each school or district was operating in a varied way, while it is also true that the process of this diversified financial budgeting was not always a strategic one.
Teresa García-Milá, Timothy J. Goodspeed, Therese J. McGuire
As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments bydevolving fiscal responsibility and authority to newly empowered regionaland local governments. Although decentralization in each country proceedsdifferently, a common element tends to be an initially heavy relianceon central government grants to fund regional spending. We develop atheoretical model of regional borrowing decisions in which the incentivesfor regional borrowing depend crucially on how the regions expect thefederal system of finance to evolve. We examine the implications of themodel using data on Spanish regions for the period 1984-1995 and findevidence that regions may be borrowing inefficiently in response toincentives imbedded in the Spanish system of fiscal decentralization.
South Africa is at a crossroads in its decentralization policy. On the one hand, it has declared its intention to strengthen the fiscal powers of local governments. On the other hand, the institutional arrangement necessary to guarantee fiscal decentralization, the power to raise local revenues, has not yet been fully defined. Nor has a target been set for the vertical division of resources between the central and lower levels of government. The revenue dimension of fiscal decentralization in South Africa is the subject of this paper. In this paper, we describe the system of local government and local government finance in South Africa. We turn then to a discussion of the normative criteria for proper revenue assignment in an intergovernmental system, and to an evaluation of each of the major revenue sources. In that context, we consider the potential role of the property tax as a source of financing local government in South Africa.
The paper provides information and analysis in support of the Bank's subnational development strategy (GN-2026). The strategy will guide future Bank operations in support of decentralization to address the complex issues countries are facing in their efforts to promote the socioeconomic development in subnational territories. The document is divided in three sections: the first section provides an overview of the decentralization process in Latin America and the Caribbean and sets the stage for an analysis of the key isuues that need to be addresses by the Bank when supporting the decentralization process in the region; the next chapter discusses the challenges confronted by subnational governments. The development of subnational governments is key to improving well-being. The next section focuses on the structure of intergovernmental relations and concludes that a well-designed structure provides subnational governments with incentives to efficiently allocate resources to the most socially profitable uses. The next chapter discusses the governance issues involved in decentralization, while the next section concentrates on the institucional aspects of the institucional aspects of decentralization and concludes that the Bank should emphasize the need for subnational governments to have sufficient institutional capacity at socially acceptable levels of performance. Finally, the last chapter discusses the variety of issues related to financing subnational governments and recommends that the Bank stress the paramount importance of sufficient sources of financing for ensuing good subnational government performance.
South Africa is at a crossroads in its decentralization policy. On the one hand, it has declared its intention to strengthen the fiscal powers of local governments. On the other hand, the institutional arrangements to guarantee fiscal decentralization -- revenue powers and expenditure responsibility -- have not yet been fully defined. Nor has a target been set for the vertical division of resources between the central and lower levels of government. The revenue dimension of fiscal decentralization in South Africa, particularly the question of an equitable vertical share for local governments, is the subject of this paper.In the first section of the paper, we ask how South Africa fits the profile of countries that are “good” candidates for decentralization. We then turn to a description of vertical revenue sharing as it presently exists in South Africa. We also offer a proposal about how an equitable vertical share for South Africa should be determined. A final section summarizes the results. The policy question raised in this paper is straightforward: What percent of all tax and non-tax revenues should be assigned to the central government and what percent should be assigned to the local government? The implementation question is also straightforward: Once the assignment is decided, how do we structure each revenue instrument to guarantee the “desired” assignment of resources?
Based on cross-country data for up to 78 countries, this paper shows that fiscal decentralization-the assignment of expenditure and revenue mobilization functions to subnational levels of government-is associated with various indicators of governance, such as corruption, rule of law, and government effectiveness. Unlike previous studies in the decentralization/governance literature, which focus primarily on expenditure-based measures of decentralization, the results reported in this paper show that the relationship between decentralization and governance depends on how subnational expenditures are financed. The higher the share in total subnational revenues of nontax revenues and grants and transfers from higher levels of government, the stronger the association between decentralization and governance.
This study discusses some characteristics in trend and operation of local finance, and suggests some reform agenda for sound finance. While the share of local finance has decreased compared with that of national finance, local debt and inefficient operations of local expenditure have increased since 1995. This study seeks to find reform agenda of local finance on the basis of decentralization and participation. On the side of decentralization, reform of local tax system and financial management system are suggested. The introduction of consensus-based budgeting and taxpayers' suit are proposed on the part of citizen participation.
The biggest tax story of the last third of the 20 th century was the value-added tax (VAT). From its tentative beginnings in the reform of the French production tax in the early 1950s, by August 2000 some form of VAT existed in at least 123 countries. Few fiscal innovations have been adopted so widely and so quickly. Towards the close of the century, another striking trend was the increasing decentralization of the public sector in many countries around the world. In this process, increasing responsibility for delivering such important and expensive public services as education and health has been devolved to sub-national governments, often to regional governments such as states or provinces. Such decentralization may make good sense in many respects, but experience suggests that it is essential to devolve responsibility not only for expenditures but also for some significant revenues if adequate fiscal accountability is to be maintained.The traditional literature on tax assignment suggests that the best form of taxation for intermediate-level governments is a sales tax. Some form or another of sales tax does in fact constitute the major source of finance for intermediate governments in many countries. Indeed, in developing countries in which income taxes do not play a major role, it is hard to see what other major revenue sources such governments could utilize. The retail sales tax once favored as a regional tax, and still in place in most U.S. states (and some Canadian provinces) is now an aberrationfrom a worldwide perspective. The only good sales tax is now generally considered to be a VAT.There appear to be at least three reasons why the question of sub-national consumption VATs needs to bereconsidered, particularly in federal countries with important regional governments. First, there are few other major revenue options open to countries in which, for whatever reason, substantial expenditure responsibilities have been shifted to lower levels of government, if those governments are to behave in a fiscally responsible manner. Second, sub-national VATs have now in fact been successfully operating in Canada for a decade and have also existed, if to less general acclaim, in Brazil for over 30 years. Finally, several novel proposals have recently been made to overcome certain problems that some see with applying the system used in Canada to other countries in which tax administration is less well developed.
Евгений Федорович Сабуров, N. Tipenko, A. Cherniavskii
Budget federalism in Russia began in 1992. Under the effects of strong centrifugal trends, the decentralization of the budget and tax system took place in the form of "waves" of agreements regarding the share distribution of tax receipts, the entry into which entailed the delegation of ever greater powers to finance spending, especially social spending, to the regions.
Abstract Decentralization in Latin America has dramatically transformed the public sector, producing a quiet revolution of popular participation in public choices at the local level. The process of decentralization has had its share of frustra tions, dangers, and false starts in the Latin American region. Fuzzy or overlap ping divisions of labor, associated threats of fiscal instability, and sustained finance for urban infrastructure still remain to be resolved in many countries. But decentralization has also produced a new generation of leaders, particularly at the local level. Several opinion polls have shown that local, elected officials were more trusted by voters and more responsive than ever to their constituents. They were also energetic, proactive, and vocal. New leaders exhibited a drive to deliver, and this made them eager consumers of new ideas and techniques. They have invented or adopted many ways to mobilize local participation, strengthen organizational capacities, and even raise local taxes, despite increasing fiows of shared revenues from central governments.
This paper analyzes financial dual track in China. We show that the co-existence of a soft-budget track (under centralized financing) and a hard-budget track (under decentralized financing) can be strictly more efficient than the two pure cases. Our argument is as follows. First, a hard budget constraint alone is not sufficient to induce sound firm performances, positive incentives in terms of firms' profitability are needed as well. Second, for an economy such as China where many firms are hopeless money losers, there is pecuniary externality in financing. That is, the total number of firms financed into operation in the economy can affect the profitability of all firms. This paper offers a number of examples of such externality. In such an economy, centralized financing helps internalize the externality, improving firms' profitability, and yet it leads to a soft budget constraint. Under decentralized financing, budget constraint is hard, but firms suffer from low profitability. A financial dual track does better: the existence of the soft-budget sector improves profitability, enhancing the disciplinary effect in the hard-budget sector. Based on this analysis, the paper sheds light on the complementary relation between soft budget constraint syndrome in the state sector and the remarkable growth of the non-state sector in China
The purpose of this paper is to examine the redistributive effects of interregional transfer of local taxes and grants from central to local government. We also examine the redistributive consequences of decentralization in the local public finance system. Especially, we focus on the impacts of the devolution of revenue instruments on the local governments. To analyze the redistributive effects, we employ the Reynolds-Smolensky index based on the Lorenz function and its decomposition. Our results show that the devolution of revenue instruments to local governments may increase the income differences among the regions
ABSTRACT Administrative reform in China has followed a different path from reform in OECD countries. Because of its different point of departure (relatively underdeveloped, centrally planned economy, and one party monopoly) reform in China has included establishing a market economy, strengthening market regulations, and institutionalizing civil service. There are some similarities between China and OECD countries, however. Both China and developed capitalist democracies have tried to downsize their public sectors, corporatize some government departments, and decentralize administration. Contrary to stated policy goals of Chinese government, net result of these changes has been to strengthen state. Moreover, reform has left both developmental and predatory natures of Chinese state intact. There is some evidence, however, that Chinese state is now seeking to become more neutral vis-a-vis INTRODUCTION Spared by economic crises and informed by New Right, public-sector reform in developed capitalist democracies has involved decentralization, deregulation, privatization, and marketization (Lane, 1997:1; Rainey, 1998: 19; Hood, 1991). The implication of these changes was that size and role of state would shrink. According to this scenario, a lean core state would remain to manage most activities indirectly. Most public goods and services would be provided by business-like executive agencies or by private sector and non-profit organizations under contract. Globalization and need to compete in an increasingly integrated market have had an impact on developing countries as well and they, too, have been encouraged to reform their public sectors. Because China has come to public sector reform from a radically different starting point from developed capitalist democracies (relatively underdeveloped, centrally planned, and ruled by a one-party monopoly), reform in world's most populous country has taken its own path. Still, reform in China has also sought a smaller, less intrusive state. This goal is neatly captured in official Chinese slogan: small government, large society. The evidence now indicates, however, that in spite if years of reform both in China and overseas, position of state remains relatively strong. The statist orientation of public-sector reform is evident in western democracies. In OECD countries, for example, although size of civil service has shrunk in many cases (including Australia, Canada, New Zealand, UK, and USA), public expenditure as a percentage of gross national product has remained remarkably stable (Ferlie et al. 1996:2-3) because the public sector continues to finance and deliver core goods and services that are of major significance to as a whole: health, education, research and development, criminal justice, and social security (Ibid., 3). In China, case is even clearer. Not only has size of public sector, especially government, been immune to years of attempted downsizing but also position of state as a result of public sector reform, especially local state, remains as strong as ever. The goal of small government, large society has yet to be realized. CONTEXT China is divided into 30 provinces or provincial-level units ranging in population from 2 million (Tibet) to over 110 million (Sichuan) people. Average provincial population is 30 to 40 million, larger than population of many countries. Provinces are subdivided into prefectures (there were 110 such units by end of 1997) or prefectural cities (22 in 1997). Prefectures in turn are subdivided into counties (1,693 in 1997) or county-level cities (442). Cities are further divided into 727 districts (State Statistical Bureau, 1998:3). Territorially based party committees, each with its own bureaucracy, manage government and economy at each administrative level (Lieberthal, 1995). …
After the 1988 Constitution, as a consequence of an unplanned decentralization process, the increase of social expenditures by local governments has contributed to aggravate the financial situation of these governments. This aggravation poses a serious problem to the financing of social policies, thus threatening their future implementation and implying the worsening of social inequalities. This paper discusses the decentralization process of public policies and the federative equilibrium in Brazil.
An alternative to centralized top‐down city governance is a multi‐level bottom‐up structure based on small neighborhood contractual communities. This paper analyzes the voting rules and public finances of decentralized, contractual urban governance and the likely outcome of such a constitutional structure, substantially reduced transfer seeking or rent seeking. Tax and service substitution, with lower‐level funding and services substituting for higher‐level public finance, is the general process by which the governance would devolve. Land rent is the most feasible source of such decentralized public finance, and local communities could also engage in local currency and credit services. Some empirical examples demonstrate the implementation of some of these governance structures.