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Fiscal Decentralisation

This article explores the potential role of local government finances in supporting agriculture. It discusses the fiscal feasibility challenge and the importance of increasing technical efficiency, allocative efficiency, and quantity of revenues. It also examines the incentives for own-revenue generation, the growth of internal and external funds, and current and future incentive schemes. The article concludes by discussing the potential indirect effects of fiscal decentralisation on agriculture and the need for appropriate expenditure assignments and capacity development.

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Fiscal Decentralisation

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  1. Fiscal Decentralisation What Role could Local Government Finances Play for Agriculture? Tewodaj Mogues Sam Benin Godsway Cudjoe

  2. Fiscal Feasibility Challenge • Increasing public investments in and for agriculture raises questions as to how to make this fiscally feasible • Fiscal feasibility constraint relaxed by increasing • “Technical efficiency” (in the use of resources) • “Allocative efficiency” (of service provision) • Quantity (of revenues) Page 2

  3. Fiscal Decentralisation • One tool for achieving this is fiscal decentralisation, and increase of districts’ internally generated revenues (IGRs) • Technical efficiency: Citizens’ stronger incentives to demand better services from local authorities when they pay taxes to them • Allocative efficiency: District governments can draw on information about local needs and conditions to allocate resources accordingly; more IGRs affords them more discretion to do so • Quantity: Local governments can tap into revenue bases to which they have better access than central government Page 3

  4. Incentives for Own-Revenue generation • For District Assemblies to effectively generate own revenues, they must have incentives to do so • Decentralisation Policy Review: “Although the DACF formulae contains a small incentive to improve on IGF [...], this is not perceived sufficient to promote improvements in the MMDA revenue mobilisation. [...] The incentives to collect revenues may be impacted negatively by the increase in grants. Further studies of this and of the real MMDA revenue potential within the existing legal framework is urgently required.” • Recently commenced study in GSSP examines the effects of external funds flows to DAs on their incentives to increase IGRs Page 4

  5. Districts’ External and Internal Funds • IGRs are a small, but not negligible, fraction of total District Assembly revenues: 16% • However, share of IGR in DA revenues has been shrinking, given • hardly any increase in internal revenue generation • precipitous increases in external transfers Page 5

  6. Growth of IGRs and External Funds Trends in per capita local revenues (in 2000 cedis) Page 6

  7. Scope for increasing local revenue effort Per capita IGR in Ashanti Region, 2004 Page 7

  8. Scope for increasing local revenue effort Per capita IGR in Northern Region, 2004 Page 8

  9. Current and future incentive schemes • Magnitudes of Average per capita public budgets at the local and central government level for 2004 (in 2000 cedis): • Local Government IGR per capita: 4,035 cedis • Local Government budget per capita: 40,773 cedis • Central Government budget per capita: 490,692 cedis • Current fiscal incentive system weak, but promising reforms being piloted (the prospects of which the aforementioned study will assess) Page 9

  10. Fiscal Decentralisation and Agriculture • District governments play only a very limited role in agriculture • Therefore, several of the other reforms would have to take place before fiscal decentralisation can have a direct and immediate effect on agriculture • However, even without/prior to these reforms, potential indirect effects: • Financing effects: Impact of (increased) local revenue generation on farmers and agriculture in general? • Expenditure Effects: Contribution for agriculture of improved local service delivery in other sectors (health, education, roads)? Page 10

  11. Fiscal Decentralisation and Agriculture • With reforms leading to greater involvement of District Governments in agriculture: • DAs’ expenditure assignments in agriculture should be in accordance with principle of subsidiarity (in this case e.g. agricultural extension, but not agricultural research) • Sequence appropriately assignment of expenditure responsibilities and development of capacity to undertake service delivery • Establishment of concurrent responsibilities, and performance measurement on basis of responsibilites, to avoid spending ‘too little’ on agriculture in favour of perceived more pressing needs Page 11

  12. Fiscal Decentralisation What Role could Local Government Finances Play for Agriculture? Tewodaj Mogues Sam Benin Godsway Cudjoe

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