Abstract Our analysis of US state‐level data on an annual frequency, from 1976 to 2008, sheds new light on a plausible causal link between infrastructure investments, namely public spending on highways, and income inequality. This causal relationship is drawn out using the number of seats in the US House of Representatives Committee on Appropriations (HRCA) as an instrument to identify quasi‐random variations in state‐level spending on highways. An exogenous pattern which emerges when a state gains an additional member to the HRCA is that it is allocated with new federal grants. This increase in federal transfers for infrastructure financing results in slashing of expenditures on highways and a crowding‐out effect of federal funding for state investments on highways. Spending cuts on highways produced by a new HRCA member being attained by a state can unwittingly cause income inequality to rise over a short 2‐year time horizon. Similar challenges with decentralized development to finance infrastructure via federal transfers to state and sub‐national governments may be encountered by other industrially advanced, emerging and low‐income developing economies. US data over the mentioned period reveal a strong positive correlation with state spending on highways and wages paid for construction jobs. Suggestive evidence indicates that the construction sector also plays an important role in the transmission channel from a rise in state spending on highways to lowering income inequality, albeit during specific intervals, as opposed to on a long‐term basis.
Given the complex and severe external economic environment and the increasing downward pressure on the domestic economy, fiscal policy, as a structural policy, is expected to stabilize growth. However, affected by the implementation of tax and fee reduction policies, the cooling of land finance and the strict control of hidden debts, the pressure on local public finances has become increasingly prominent, and the space for proactive fiscal policies is limited. In order to make subsequent policies more steadily advancing in response to the downward pressure on the economy, on the one hand, we must ensure fiscal sustainability to provide guarantees for the stability and sustainability of economic operation; on the other hand, we must avoid preventing and controlling risks in a “one-size-fits-all” way to leave a cushion for expansionary policies. Therefore, under the current economic and fiscal situation, it is of great practical significance to scientifically understand local fiscal situation and examine the impact of key institutional factors on local fiscal sustainability based on the Chinese-style fiscal and political systems.Fiscal competition and soft budget constraints are the two core issues contained in the Chinese-style decentralization system, which have a profound impact on the fiscal behaviors of local governments. This paper integrates the two into a unified analytical framework, analyzes their impacts on local fiscal sustainability by distinguishing the modes of fiscal competition and the forms of soft budget constraints, and investigates the interaction effects between them. The results show that both tax competition and expenditure competition have a significant negative impact on fiscal sustainability. For different forms of soft budget constraints, the effect of transfer payments on local fiscal sustainability is uncertain, while land revenues and municipal investment bonds have a significant negative effect. Research on interaction effects shows that the interaction between transfer payments and fiscal competition is conducive to fiscal sustainability, but the interactions between land finance, municipal investment bonds and fiscal competition are not conducive to fiscal sustainability. Further research indicates that there is regional heterogeneity in the above effects.This paper proposes the following policy recommendations: Firstly, it is very necessary to establish a fiscal system that the revenue resources and expenditure responsibilities commensurate, reform the political promotion mechanism and establish a diversified performance evaluation system. Secondly, in the governance of excessive fiscal competition and soft budget constraints, the interaction between them should be considered. More specifically, central government may encourage standardized and orderly fiscal competition to reduce local government's reliance on off-budget revenue, and increase transfer payments to ease excessive fiscal competition. Thirdly, to ensure sufficient fiscal space and sustainable fiscal policies, differentiated designs should be made according to the economic development level and fiscal status of different regions, as well as the interactive mechanism between the modes of fiscal competition and the forms of soft budget constraints.
Today, the problem of cities local finances and their governance, is at the heart of major national debates and reforms, as well as major concerns in all countries where decentralization continues and aims to strengthen the autonomy and competences of local administrations. The mobilization of local fiscal potential is a fundamental condition for promoting sustainable urban development. Despite the efforts made, local Moroccan finance, like most developing countries, does not escape an absolute reality: The scarcity of the resource. The weakness of local resources in Morocco is more related to the real low level of local tax deduction than to the economic poverty of local authorities. Many sectors of the economy have very little or no tax, while property taxes does not contribute enough to local economic activity. This article uses the case of Morocco to analyze the challenges and failures of local finances in general, and of local taxation in particular. We also discuss the tools to promote the financing of cities to promote sustainable urban development in Morocco.
Cities are the engines of economic growth, drivers of structural and spatial transformation processes, and the generators of wealth. However, city finances in India are in an abysmal state, and its urban local bodies are progressively losing fiscal autonomy. The problem is deeply rooted in the hierarchy set up defined as per the fiscal federalism framework adopted by the nation. The objective of the paper is to critically review India's federalism, discuss its prevailing expenditure‐revenue assignment framework, and analyse the key issues in fiscal decentralization. This paper overviews the entire public finance system in India, brings out the anomalies in expenditure and revenue assignments between the higher levels of government and the urban local bodies, and addresses the areas of concerns at the urban local government level. It also suggests policy measures to put Indian urban local bodies on a strong footing in the public finance map of India.
How decentralized government structure influences public service delivery has been a major focus of debate in the public finance literature. In this paper, we empirically examine the effect of fiscal decentralization on natural disaster damages across the U.S. states. We construct a unique measure of decentralization using state and local government expenditures on natural resources, which include investment in flood control and mitigation measures, among others. Using state‐level panel data from 1982 to 2011, we find that states that are more decentralized in natural resource expenditures have experienced more economic losses from floods and storms. This effect is only pronounced in states that are at higher risks of flooding. Our findings suggest that fiscal decentralization may lead to inefficient protection against natural disasters and provide implications for the assignment of disaster management responsibilities across different levels of government in the U.S. federal system.
In this note I show that quadratic funding achieves decentralized social efficiency in the extent there are enough (donor) matching funds to cover the quadratic funding objective. If individual backers internalize that matching funds will not be sufficient to reach the quadratic level, allocation will be biased towards the capitalist allocation, the more so, the less matching funds are available. This result emerges even when individual contributors are not required to finance the deficit (i.e., the difference between total contributions and available matching funds). I also show properties of the level of required matching fund, in order to better understand under which conditions social efficiency will most likely be compromised.
This paper contributes to the empirical literature on the linkages between decentralized government spending, public finances, and economic growth at the local level. The impact of local government spending on output growth is estimated using a panel of Italian Labor Market Areas - a group of municipalities adjacent to each other, geographically and statistically comparable, characterized by common commuting ows of the working population - during the 2002-2012 period. The attention is focused both on current and capital expenditures as well as on several spending categories. To handle endogeneity problems between public spending and economic development, a system generalized method of moments has been used. The findings indicate a fairly robust negative relationship between local current government expenditure and economic growth. Investment in capital budget turns out to be not statistically significant when the public spending composition is taken into account. Municipalities located in central-southern regions show, instead, negative growth e ect of capital spending, underlining the importance of measuring the efficiency of public spending rather than just being concerned with the absolute level of output. Only few of the expenditure categories (Justice, Tourism and Culture) exhibit positive effects on growth, while Administration & Management and Roads & Transportation have negative growth effect in southern regions.
This article discusses the features of implementing tax federalism in a unitary state. The article analyzes the implementation of the fourth level of the budget in the Republic of Kazakhstan, as well as the experience of tax independence of municipalities in the European Union. The article analyzes the weaknesses of the current model of financing local self-government in the Republic of Kazakhstan and the state of self-government in General. It is assumed that the system used for financing the local community does not fully use the economic and investment potential of the territories. It is proposed to introduce elements of an independent fiscal policy at the local government level in the Republic of Kazakhstan to increase the investment attractiveness and self-sufficiency of the fourth-level budgets.
Nuwun Priyono, Siti Arifah, Eva Wulandari, Panji Kusuma Prasetyanto
The purpose of this study is to prove to what extent the influence that fiscal decentralization, local financial performance, local government expenditure, Locally Generated Recurring Revenues or Pendapatan Asli Daerah (PAD), Profit-Sharing Fund or Dana Bagi Hasil (DBH), General Allocation Fund or Dana Alokasi Umum (DAU), and Special Allocation Fund or Dana Alokasi Khusus (DAK) have on the level of society welfare. The objects of this research are Regencies and Municipalities in Java Island. The data used in this study are the secondary. The data on balance sheet and realization report of the regional revenues and expenditure budget (APBD) are from the Ministry of Finance of the Republic of Indonesia. The data on the level of society welfare that is proxyed by the value of HDI is obtained from Bappenas and BPS of Central Java. This research uses time series data from 2012- 2014 periods. The research method used is the research of causality with linear regression model. The result of the significance test shows that only one DAK variable can partially affect the HDI variable. Meanwhile those variables other than DAK partially or individually do not influence the HDI variable. The result of regression analysis shows that simultaneously such variables as Fiscal Decentralization, Regional Finance Performance, Local Government Expenditure, PAD, DAU, DAK and DBH have an influence on HDI in Regencies / Municipalities in Java Island.
Ravi Shekhar Vishal, Sheetal Singh, Kala Seetharam Sridhar
This chapter summarizes the research on urban finances in India and China. It first discusses the background urbanization and economic growth in the two countries, followed by a description of the decentralized nature of government at the local level in India and China, following which this chapter debates and discusses reforms in municipal finance (both revenues and expenditures) in the two countries. The chapter ends by concluding and drawing lessons from India from a practitioner’s perspective.
Fiscal federalism demands that each level of government should have adequate resources to perform its functions without appealing to the higher level of government for financial assistance. It is the division of taxing and expenditure functions among levels of government. But the experience in Nigeria shows that local governments have not been able to embark on socio-economic development in their areas without appealing to the higher levels of government namely; federal and state. This is as a result of unmatched functional responsibilities with financial strength or capabilities, overdependence on statutory allocation, tax evasion, restricted revenue jurisdiction by the local government etc. This study examines fiscal federalism and socio-economic development in Nigeria with specific attention to local government finance. The study adopts fiscal decentralization theory as its theoretical framework. The study employs survey method which involved the administration of questionnaire on 600 respondents from the six (6) geo-political zone in Nigeria. The study reveals that fiscal responsibility and taxing powers still remain considerably centralized with the Federal Government taking the lion share without much impact on the people. The study further reveals that, the most viable and productive taxes are exclusive reserve of the Federal Government which further strengthens its financial muscle vis-a-vis Local Government. Based on this, the study recommends among others, that, both federal and state government should ensure that functional responsibility of local government is commensurate with its financial capabilities and more power should be given to local government to generate more funds in terms of tax regimes.
Qurat ul Ain, Tahir Yousaf, Yan Jie, Yasmeen Akhtar
This paper provides empirical evidence on the association between post-2001 devolution reform policy, government size, and specifc components of government expenditures based on a sample of panel data of provincial units in Pakistan from 1990 to 2015. The results demonstrate that devolution is associated with a larger government size, which provides empirical support for the common-pool hypothesis, implying that the decentralization that matters for the size of the general government depends on how sub-national governments finance their expenditures. Moreover, the fndings suggest a signifcant increase in the magnitude of Health and education facilities at the local level following the devolution reforms.
Purpose Over the past 20 years, China's infrastructure has developed at an extraordinary speed. The current literature mainly focuses on the effects of political incentives on the infrastructure. However, this paper indicates that the structural change of China's land regime is an important clue and that the supernormal development of China's infrastructure is an explicable result for that. Design/methodology/approach This paper theoretically proves that in a politically centralized and economically decentralized economic entity with a public land-ownership regime, the self-financing mechanism formed by local officials through regulation of the land-grant price is the primary factor that influences the optimal supply volume of infrastructure in a region, in addition to political and economic incentives, and whether the self-financing mechanism can be formed or not depends on the structure of a country's land regime, which can help to explain the difference between the development of infrastructure in China and that in other developing countries from a theoretical angle. Findings The paper suggests that the mode is facing an important transformation toward land reform and new-type urbanization construction, and the replication and promotion of China's experience in infrastructure construction are of further significance under the Belt and Road Initiative as it provides a method for helping developing countries to eliminate infrastructure bottlenecks. Originality/value Through the test of multinational panel data, the paper indicates that the structural change of China's land regime around 1990 had an overall effect on the supernormal development of infrastructure in China. The paper indicates that the “land-based development mode” of China's infrastructure indeed contributed to the supernormal development of infrastructure in China, but there are still some shortcomings in this mode.
This Special Issue publishes high quality papers on contemporary issues in business and economics in Vietnam and other Asian emerging markets. These papers were accepted and presented at the 2019 Vietnam’s Business and Economics Research Conference (VBER2019) organized by Ho Chi Minh City Open University, Vietnam in July 2019. Emerging issues in business and economics from Vietnam and other emerging markets in the Asian region have been addressed from various angles, from economics, finance, and statistics to management science. Five out of the 14 studies in this book were conducted to investigate various issues in relation to the Asian region such as the exchange rate regime in Asia, financial inclusion, and financial development and income inequality in Asian emerging markets. Seven studies were conducted in response to emerging business and economic issues in Vietnam such as fiscal decentralization, urbanization, foreign direct investment, and corporate financial distress. Other papers even considered various relevant aspects from the United States and Europe to the Asian region including double taxation treaties and agricultural shocks to the oil price. The findings from these papers are useful for practitioners, policymakers, and academics.
In the past two decades, land finance, a phenomenon of the financing arrangement based on land development, has gradually become a fiscal model that profoundly affects China's economic development. Based on the theory of fiscal decentralization and environmental federalism, this study employs a specially designed two-stage regression method to capture both direct and indirect (through economic development and industrial structure) influences of land finance on carbon emissions. Using the provincial panel data for the period of 1998–2016, the empirical results indicate that the direct influences are dominant, and the total impact of land finance on carbon emissions is non-linear and is dependent on the level of Gross Domestic Product (GDP) per capita. After 2003, the total effect is that carbon emissions increase continuously along with the economic development. To balance economic development and environmental protection and to enhance sustainable development, the traditional style of land finance should be changed as soon as possible.
In this thesis, we examine the political economy of public finance. I provide a general introduction to the thesis in Chapter 1. In Chapter 2, I examine the determinants and interrelationship of different types of government expenditure using data on 73 countries for the period 1990-2016. The results show foreign aid receipts and urbanization have raised total expenditure, but external debt stocks have reduced total expenditure. Also, there is a substituting relationship between expenditures on social protection and pure public goods, and education and defence, but complementary relationship between all other categories of government expenditure. \nIn Chapter 3, we provide an up-to-date empirical assessment of the relationship between economic globalisation and government spending for the ‘hyper-globalisation’ period of the 1990s and 2000s. The results suggest that hyper-globalisation has had divergent and conflicting effects on consumption spending: while the globalisation of trade has tended to raise spending, the globalisation of finance and foreign investment has tended to reduce it. However, the size of the effects is quite small, and there is no evidence that spending has risen by more in countries which are particularly prone to terms of trade shocks. \nIn Chapter 4, I examine the mediating effect of democracy in explaining the relationship between decentralization and government size for the period 1970-2013. I proxy decentralization by fiscal decentralization, use total spending as our primary measure of government size, and adopt the V-Dem high-level democracy indices as measures of democracy. I use the fixed effects estimator with Driscoll-Kraay standard errors and the instrumental variable estimation technique. Our main finding is that fiscal decentralization and democracy in themselves are effective tools to ‘starve the beast’ as they lead to reduced government size, with the former suggesting support for the Leviathan hypothesis. I find evidence of the mediating effect of democracy in the relationship between decentralization and government size; a positive and statistically significant effect of the interaction term with the effect size largest for participatory democracy. We do not find a non-linear relationship between decentralization and government size. \nIn Chapter 5, we examine how local governments’ political alignment with the central government affects subnational fiscal outcomes. We analyze data from Ghana, which has a decentralized political structure with substantial political and fiscal powers delegated to the district level, and high dependency on intergovernmental transfers. Using a regression discontinuity design for a new dataset for 1994-2014, we find that districts with an aligned Member of Parliament and District Chief Executive (DCE) receive more transfers and have higher expenditures. In a second step, we instrument transfers and estimate a flypaper effect for Ghanaian districts.
In the given paper, the features of the influence of institutional incentives and power tools on the efficiency of decentralization in ensuring prosperity and in the context of economic growth are explored. The purpose of the given paper is to determine the instruments of government and to characterize the methods of using them to promote decentralization, as well as the mechanisms for financing local governments, the decentralization of information and to define their role in the application of market incentives for decentralization. To study the peculiarities of power tools and institutional incentives for decentralization, to determine the conditions for effective work of local government financing mechanisms, the benefits of information decentralization and types of market incentives, a methodology of desk research was used with analysis of the results of theoretical and applied research published in foreign literature. Secondary information has been gathered in the context of the experience of implementing reforms on decentralization of state power, the peculiarities of the institutional environment and the establishment of stimulating factors for increasing the efficiency of state power. Institutional incentives to increase the effectiveness of decentralization have a complex hierarchical structure, and their impact depends on many factors of local culture and management traditions. Decentralization of information and different market incentives may also have different effectiveness in their application. In any case, many changes are needed in the political system. In future studies, it is planned to focus on the peculiarities of decentralization in certain regions of Ukraine and to assess the state of implementation of the proposed mechanisms for funding local governments in specific circumstances.
The research on the influencing phenomena at the budgetary process of Local Government Union Councils in Bangladesh is based on a combination of political psychology, applied economics and public management issues (i.e. decentralization, local government finance, and local governance, as well as the budgeting theory and local government budgetary process). The purpose of the research is to explore the critical influencing phenomena and their relative influences on Union Councils’ budgeting decisions. The study reveals that the influence of concerned phenomena or issues does not always collide with the budgetary autonomy of Union Councils, but the effects of the influencing issues on their budgeting decisions are evident with varying degrees and dimensions. The study has employed qualitative method with six case studies on criteria based purposively selected Union Councils at Sunamganj District in Bangladesh.
The author considers fiscal incentives of regional authorities in the system of federal intergovernmental relations. The aim of the study is to determine how the debt burden of Russian regions affects regional fiscal policy in the context of federal co-financing of expenditure obligations. The work employed the methods of grouping, one-dimensional cluster analysis, correlation analysis, and regression by generalized method of moments (system-GMM). The study found that the increase in the regional debt burden relates to a decrease in the level of local fiscal decentralization. Intensive debt financing of regional expenditures in 2013–2015 also reduces the willingness to regionally co-finance federal priorities. The author concludes that high debt burden reduces the fiscal incentives of regional authorities to co-finance federal initiatives and creates the risk of underfunding of national projects.
Decentralization in the public sector, in general, has been discussed in the perspective of revenue sharing between spheres of government in the federation and the distribution of decision-making autonomy in the application of public resources and government management processes. This research is part of this context, and it investigates the decentralization of the expenditure execution process, a practice carried out within governments, and its impact on municipal spending. The analysis was carried out from the perspective of the Theory of Public Choice, which presupposes the self-interested behavior of managers when they participate in government decision-making processes and, therefore, the autonomy granted to them to decide on expenditure is important. To operationalize the research, five areas of government activity were selected – education, health, social assistance, sports and leisure, and urbanism – to represent different expenditure characteristics and sources of financing to explain the behavior of managers in different expenditure realities. The data were collected through an electronic questionnaire, whose respondents were managers of city halls, complemented by data from public sources of information. The econometric analysis was done through the estimation of the model by quantile regression for each of the areas analyzed, with data from 290 municipal governments in the period between 2013 and 2018. The results show that the decentralization of the process of spending execution (i) for area with insufficient resources decreased the expenditure; (ii) for areas with insufficient resources and characteristics that make it possible for managers to bargain budgets, the expenditure has increased; and (iii) for areas with insufficient resources, but without characteristics that allow bargaining by budget, decentralization was ineffective. It is concluded, therefore, that the decentralization of spending execution affects municipal expenditure and these effects are different depending on the characteristics of the area in which decentralization occurs, since the behavior of managers is affected by these characteristics. This research points out theoretical implications when it highlights the behavior of managers and the expenditure characteristics of the areas as relevant factors to be considered in the analysis of the relationship between decentralization of spending execution and expenditure. Governments can use the results of this research to assess the desirability of decentralization, as well as consider the need to implement controls on expenditure in decentralized environments.
Fiscal asymmetric decentralization is seen as the panacea in solving persistent income inequalities facing developing economies. Despite efforts to finance County governments, about 42% of Kenyan’s 47.6 million people still live below the poverty level. This study evaluates the influence of County fiscal autonomy on household effects in Kenya. Both primary and secondary data, collected from households in 47 county governments and the Commission on Revenue Allocation, respectively. A Sample of 4,813 households was drawn from 96,251 lists of households developed by Kenya National Bureau of Statistics. Cochran's correction formula was used. The result finds an insignificant negative correlation between county fiscal autonomy and household effects in Kenya. Further studies are recommended with diverse indicators. Findings in this paper are generalizable and a point of reference for policymakers in Kenya.