Transcript Presentatie THA

Harmonisation, Decentralisation and Local
Governance
Session overview
 Understanding the context of fiscal decentralisation
 Assigning expenditure responsibilities
 Instruments for financing local government
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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)
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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
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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
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Local governments have grown up
 Politically driven decentralization: Autonomy versus
dissolution
Some observations about fiscal
decentralisation around the world
 It 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, overfragmentation 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 pillars
Intergovernmental finance:
Four pillars
 The assignment of expenditure responsibilities
 The assignment of revenue sources to subnational
governments
 The allocation of intergovernmental fiscal transfers or
grants
 Rules on subnational budget deficits and the
incurrence of subnational debt
‘The first pillar of intergovernmental finance’
The assignment of expenditure
responsibilities
 What 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 Principle
 Government 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-dimensional
 Within a certain sector or function, responsibility can
be assigned separately for:
 Policy and regulation
 Financing
 Provision (responsibility) of the service
 Production (delivery) of the service.
General application of subsidiarity
principle to different dimensions
 Responsibility for policy and regulation: often central
government
 Responsibility 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.
Local taxation and user fees
Intergovernmental transfers
Financing capital investments
“Finance should follow function”
 Local governments provide different types of goods
and services, including
 ‘Club goods’
 Local public goods
 Social services
 Local expenditure functions should be financed
depending on the nature of the good or service
provided
“Finance should follow function” (1)
“Finance should follow function” (2)
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 subnational governments
 Allows decentralised tax administration (when local
governments are in a better position to collect)
Features of an ‘ideal’ local revenue
source
 Subnational governments should be assigned taxes
that achieve a ‘correspondence’ between the tax and
the benefits from local goverment services
 Relatively easy to administer
 Should not be easy to give ‘perverse incentives’ to
taxpayers
Suitable local revenue sources
 Property taxes
 Market fees and other local user fees
 But also…
 A ‘piggy-back’ personal income tax
 Local business fees (but not CIT)
 Sales taxes (but not VAT)
 Motor vehicle taxes
Conclusions on fiscal
decentralisation and local revenues
 Local 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 underemphasised 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 revenuesharing 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 transfers
 Improving the vertical fiscal balance of the system of
intergovernmental relations
 Improving 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 mechanisms
 Define the purpose
 Determine size of the transfer pool
 ‘Horizontal’ allocation of transfers between
government units
 Conditional (specific / earmarked), sectoral, or
unconditional transfers
 Nature of transfer: matching grant or lump sum
(block) grant
Finally, the fourth pillar of subnational
finance: deficits and debt
 If 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 finance
 In many LDCs, the absence of market-based
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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)).
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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.