Fiscal Decentralization
Depth of Decentralization
Deconcentration.
Responsibilities are moved downstream.
Delegation.
Local government are agent of central government.
Devolution.
Power to decide is moved downstream.
Up- or Down- stream
?
Bottom up approach.
Emphasizes participation and efficiency.
Top down approach.
Shift problem (deficit) from central government. Decentralization.
Potential Problem
Decentralization may cause an unstable macro economy
(Argentina, Brazil, China).
This occurs when revenue and expenditure decentralized are
unbalance.
Definitions
Fiscal Decentralization refers to an
intergovernmental system where the balance of power moves toward the sub national government sector.
Advantages of Fiscal Decentralization
Move Government closer to the people. Broaden the Tax Base.
Components of System of Fiscal
Decentralization
Necessary Conditions.
Elected Local Council.
Locally Appointed Chief Officers.
Significant Local Government Revenue Capacity.
Significant Local Government Expenditure Responsibility. Budget Autonomy.
Components of System of Fiscal
Decentralization
Desirable Conditions.
Obstacles to Fiscal Decentralization
Increase in Number of Local Units of Government. Unfunded Mandates.
Failure to Devise Expenditure Assignment. Too Few Tax Sources for Local Units.
Failure to Develop Credit and Borrowing System. Financial Controls Retained by Central Level.
Lack of Intergovernmental Fiscal System based on Transparency
Local Borrowing
Advantage: Capital investments. Problems:
moral hazard.
expectations of bailing out.
Solutions
Increased tax powers to LG (many rich countries). Allow LGs to bankrupt (Morocco).
Use fungible transfers as collateral (Tunisia, South
Africa, Argentina)…
…but this requires high predictability of transfers (through
Local Taxing Powers
Local capacity.
Upstream accountability (Uganda).
Downstream accountability (information to
voters and tax payers).
High autonomy can work (Colombia,
Problem with Local Taxes
Vertical imbalance:
CG collects taxes more efficiently.
Solution: residents pay for what they get - and no more (no tax
exporting).
Horizontal imbalance:
Transfers
Targeted transfers are often used for infra
structure (Morocco, Tunisia).
Fungible transfers may also work
(Colombia, rich countries)…
…but require high local capacity.
Alternative may be Social Investment Funds
Requirements of a SIF
Latin American experience suggests the following:
Cost-sharing by all involved.
Demand-driven project identification. Transparency and accountability.
Autonomy from red tape.
Conditions for Success
Local decision process is democratic.
(so Argentina has been more successful than China).
Costs must be borne by decision-makers...
…so LG need to control rates (and bases) of at least some
taxes.
