an overview of fiscal decentralisation : theory and practice
Post on 31-Dec-2015
117 Views
Preview:
DESCRIPTION
TRANSCRIPT
Session overviewUnderstanding the context of fiscal
decentralisationAssigning expenditure responsibilitiesInstruments for financing local government
intergovernmental transfers local taxation and user fees investment capital
Assessing fiscal decentralisation and monitoring reforms and impact of aid
iDPWGs Specific Guiding Principles:Strengthening fiscal decentralisation and local authorities financing:
“Fiscal decentralisation is a key factor and driver for successful decentralisation.
Support to fiscal decentralisation should aim at strengthening the long-term
financial development and sustainability of local governments.”
Decentralisation - Traditional definition
“Decentralisation is the transfer of authority and responsibility for public
functions from the central government to subordinate or quasi-independent
organizations or the private sector.”
(Litvack and Seddon 1999)
Why (fiscal) decentralisation?Inefficient centralisation (largely theoretical)
Unable to accommodate differences in local needs and preferences
Inefficient taxation: poor match between government services and tax costs
Excessive centralisation inhibits growth
Improve public services, reduce poverty and encourage economic development
Local governments have better info on local needs / incentives for more responsive government
Fiscal incentives for regional development
Why (fiscal) decentralization? (Continued)Governance-driven decentralization: Greater
accountability at the local government level to provide
Local governments have grown up
Politically driven decentralization: Autonomy versus dissolution
Some observations about fiscal decentralisation around the worldIt is often history and politics -not economics-
that determines subnational government structure and drives fiscal decentralisation reforms
Many fiscal decentralisation reforms shifted the financial resources to the local government level, but failed to decentralise the discretion to manage these resources
In developing and transition countries, over-fragmentation of subnational government structure has been a common occurrence
New “consensus” on decentralisation
“(Fiscal) decentralization is the empowerment of people by the (fiscal) empowerment of
their local governments.” (Roy Bahl, 2005)
Implications of new definition (1)Recognition that fiscal decentralisation
requires more than just a ‘pushing down’ of financial resources – control over these financial resources matters just as much
Decentralisation is tied much more closely to governance and poverty reduction (empowerment)
Implications of new definition (2)In order to achieve the benefits of fiscal
decentralisation, ‘institutions matter’The quality of the design of intergovernmental
fiscal systems matters a great deal to achieve efficient and equitable outcomes
Decentralised political systems matter (local politicians should serve the community)
Local officials should have control over the local public service (hiring and firing)
Local corruption exists. Achieving local accountability is complex but possible (and easier than fighting central corruption)
Revisiting the “Wall of wonders”The system of intergovernmental fiscal
relations should be well-designed in its own right
The fiscal, political and administrative dimensions of decentralisation should be properly aligned
For every element of decentralisation (including fiscal decentralisation), there is a need to balance discretion with accountability
Intergovernmental finance: Four pillarsThe assignment of expenditure
responsibilities The assignment of revenue sources to
subnational governmentsThe allocation of intergovernmental fiscal
transfers or grantsRules on subnational budget deficits and the
incurrence of subnational debt
The assignment of expenditure responsibilitiesWhat functions and expenditure
responsibilities are (or should be) assigned to each level of government?
Subsidiarity principle Multi-dimensional nature of functions Accountability mechanisms in place
The Subsidiarity PrincipleGovernment services should be provided at
the lowest level of government that can do so efficiently.
Generally this means that public services should be provided at the level of government compatible with the “benefit area” of the service. If the benefits area is smaller (or greater) than
the jurisdiction, the provision choice will be inefficient.
But, it’s not all or nothing: expenditure responsibilities are multi-dimensionalWithin a certain sector or function,
responsibility can be assigned separately for:Policy and regulation FinancingProvision (responsibility) of the serviceProduction (delivery) of the service.
General application of subsidiarity principle to different dimensionsResponsibility for policy and regulation: often
central governmentResponsibility for financing: local social
services should be financed centrally; local economic functions can be financed locally
Responsibility for provision of the service: can often be done by LGs
Production (delivery) of the service: either LG or private sector
Further stipulations to the subsidiarity principle Local ability to efficiently provide public
services further requires:Elected local government: Appropriate,
participatory and accountable local governance structures
Locally appointed officials and local human resource capability to deliver adequate public services
Adequate local financial management systems to assure transparency and sound PFM
Different countries have ended up with widely different practices
Functions typically devolved to the local government level:
Basic education, basic health services, agricultural extension, (rural) water supply, local roads
Urban services (public utilities, roads, sanitation)
Note that many of these functions are closely related to achieving the MDGs !
In general…It is important to have a clear and stable
assignment, but there is no single ”best” assignment of expenditure responsibilities that applies to all conditions….
Open invitation: To what extent has real authority been
decentralised to the local level in your country of work?
But in reality....Decentralisation reforms most often go
wrong in expenditure assignments, since the willingness across key stakeholders to decentralise real authority to the local level is often missing.
“Finance should follow function”Local governments provide different types of
goods and services, including‘Club goods’Local public goodsSocial services
Local expenditure functions should be financed depending on the nature of the good or service provided
The revenue assignment question (second pillar)Which tax sources or non-tax revenue
sources (including fee revenues) will be made available to subnational governments in order to provide them with revenue sources?
The assignment of own revenue sources is considered the second ‘pillar’ of intergovernmental finance
Why have sub-national taxation?Sub-national governments are often more
accountable for controlling spending if they are also responsible for revenues
Reduces excessive demand by sub-national governments for transfers from the center
Allows tax policy (tax levels and structure) to be tailored to the conditions and preferences of sub-national governments
Allows decentralised tax administration (when local governments are in a better position to collect)
Features of an ‘ideal’ local revenue sourceSubnational governments should be assigned
taxes that achieve a ‘correspondence’ between the tax and the benefits from local goverment services
Relatively easy to administerShould not be easy to give ‘perverse
incentives’ to taxpayers
Suitable local revenue sourcesProperty taxesMarket fees and other local user fees
But also…A ‘piggy-back’ personal income taxLocal business fees (but not CIT)Sales taxes (but not VAT)Motor vehicle taxes
Conclusions on fiscal decentralisation and local revenuesLocal revenues should be an important part of a
well-functioning intergovernmental fiscal system, both for economic and accountability reasons
But, raising more local revenues is only efficient if the revenues are well-spent, and
Neither central politicians nor local politicians have a strong incentive to rely heavily on local government revenues
As a result, local revenues are often an under-emphasised part of fiscal decentralisation
Intergovernmental fiscal transfers (the third pillar)
Since own source revenues are (almost) never enough to covers local expenditure responsibilities, central (or regional) governments may provide local governments with additional resources through a system of intergovernmental fiscal transfers, such as revenue-sharing or grants
In most countries, transfers are (by far) the main funding source for local government, esp. for social sector services
But transfers do not have same accountability benefits as own source revenues
Sound reasons for intergovernmental fiscal transfersImproving the vertical fiscal balance of the
system of intergovernmental relationsImproving the horizontal fiscal balance of the
system of intergovernmental relations (in other words, equalisation).
Compensating for the presence of spillovers or “externalities” between jurisdictions
Funding national priorities or “merit goods”
Dimensions of intergovernmental transfer mechanismsDefine the purposeDetermine size of the transfer pool‘Horizontal’ allocation of transfers between
government unitsConditional (specific / earmarked), sectoral,
or unconditional transfersNature of transfer: matching grant or lump
sum (block) grant
Finally, the fourth pillar of subnational finance: deficits and debtIf subnational governments do not carefully
balance their annual expenditures with revenues and transfers, this will result in subnational deficits and the incurrence of subnational debt.
In many developed economies, local borrowing is an appropriate way for local governments to fund capital infrastructure, since (i) it corrects the inter-temporal mismatch between costs and benefits, and (ii) there are numerous mechanisms that assure responsible borrowing.
Local capital financeIn many LDCs, the absence of market-based
mechanisms to enforce a ‘hard budget constraint’ requires restricting local borrowing:
Rules-based restrictions Permission required Local government bank / loan fund No borrowing allowed
Instead, capital grants are often relied on to fund local capital development.
Useful source of information:World Bank: Fiscal decentralisation indicators
(derived from the IMFs Governance Finance Statistics (GFS)). The GFS covers 149 countries on a yearly basis and
is the only data source with such comprehensive coverage, although the number of countries with sub-national data is reduced by about two thirds.
It has more than 50 variables for each government tier allowing fairly detailed analysis of fiscal flows..
Cautioning note: standardisation inevitably leads to a loss of detail and data richness that must be kept in mind when using GFS data to assess decentralization.
top related