Introduction to Fiscal Decentralization

1
Introduction to Fiscal Decentralization
2
Three Economic Roles of Government

• Equitable Distribution of Income
• Stable Economic Environment
• Efficient Allocation of Resources

3
Definitions

• Fiscal Decentralization refers to an
  intergovernmental system where the balance of
  power moves toward the subnational government
  sector
• Intergovernmental Fiscal Relations refers
  generally to division of fiscal powers and
  responsibilities among levels of government

4
Advantages of Fiscal Decentralization

• Move Government closer to the people
• Broaden the Tax Base
• Allow for alternative service delivery in social
  services

5
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
• Hard Budget Constraint
• Transparency

6
Components of System of Fiscal Decentralization

• Desirable Conditions
• Freedom from Excessive Central Expenditures
  Mandates
• Unconditional Transfers from Higher Level
  Governments
• Borrowing Powers

7
Five Building Blocks of Fiscal Decentralization
8
Structure of Government Sector

• Tiers of Government
• 2 or 3 Levels-Central,Regional, Local
• Size of Subnational Units
• Administrative-Territorial Divisions
• Boundaries of Subnational Units
• Fiscal Capacity
• Population-5,000 plus

9
Expenditure Assignments

• Functions and Services Performed by Subnational
  Units
• Education
• Health
• Transportation
• Social Services
• Land Use Planning

10
Revenue Assignments

• Local Taxes and Fees
• Own Source Revenues
• Shared Revenues

11
Intergovernmental Transfers

• Central to Local Levels
• General Transfers (Equalization)
• Conditional or Categorial Grants

12
Subnational Borrowing

• Loans
• (short term debt)
• Debt Issuance (Bonds)
• Long Term Debt for Infrastructure

13
Obstacles to Fiscal Decentralization in CEE and
CIS Countries

• 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 Rather than Negotiation and
  Political Influence

14
Entry Points for UNDP

• Development of Intergovernmental Equalization
  Formula
• Improved Budgeting Techniques
• Program or Results Based Budgeting
• Revenue Forecasting
• Tax Administration and Collection
• Local Taxes and Fees
• Property Taxes
• Support for Financial Training
• Anti-corruption and Transparency