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UNDP Training Programme: Decentralisation and Local Governance (RBEC) Fiscal Decentralisation

UNDP Training Programme: Decentralisation and Local Governance (RBEC) Fiscal Decentralisation. Nick Devas IDD, School of Public Policy June 2007. Fiscal Decentralisation: Principles. Resources follow function Criteria for allocating functions Criteria for allocating resources

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UNDP Training Programme: Decentralisation and Local Governance (RBEC) Fiscal Decentralisation

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  1. UNDP Training Programme: Decentralisation andLocal Governance (RBEC)Fiscal Decentralisation Nick Devas IDD, School of Public Policy June 2007

  2. Fiscal Decentralisation: Principles • Resources follow function • Criteria for allocating functions • Criteria for allocating resources • Balanced budgets, based on realistic revenue forecasts and rules about borrowing • Scope for improved performance: revenue mobilisation and expenditure management

  3. Assignment of Functions • CG: broad policy, performance targets, monitoring • LG: local priorities and implementation • Sectors with local diversity, limited spillovers and modest economies of scale • Sectors not requiring uniform national standards • Local capacity constraints • Problem of small size • Divisions within multi-tier system

  4. Resource Assignment • Central governments collect main revenues – for good efficiency, equity and administrative reasons • SNGs/LGs usually have limited revenue sources: criteria for assignment • Vertical balance • Redistributing centrally collected resources: • revenue sharing • grants • horizontal balance / equalisation

  5. Criteria for Assigning Local Taxes • Yield: adequacy, stability, elasticity • Low collection costs • Equity: vertical, horizontal • Neutrality: effect on relative prices & incentives • Administrative capacity • Political acceptability: visibility • Ease of assigning revenue to right LG • Tax burden falls in residents, not exported • Not creating inter-regional distortions • Scope for local choice about tax rate • Resource for all LGs

  6. Local Taxes: Conclusions • No local tax is perfect: criteria conflict • Best ones may overlap with central taxes • More than one local tax but not too many • Central prescription of tax objects / tax base • Some local choice over tax rates (but limits?) • Assessment centrally or locally • Local collection • Local choice about use of revenue

  7. Typical Local Taxes • Property taxes (land, buildings, transfers) • Vehicle taxes (annual, transfer) • Business taxes (but problems of assessment and conflict with national taxes) • Income tax: but best as share of central tax • Tourism, hotels, entertainments • Electricity consumption • Others: advertisements, bicycles, alcohol

  8. Improving Local Tax Performance • Property tax: valuation basis (rather than size) and updating valuations • Updating tax registers • Increasing tax rates in line with inflation • Simplified collection systems • More effective enforcement measures • Proper accounting and record keeping • Balance between effectiveness (more revenue) and efficiency (less cost)

  9. Charging for Local Services • For services where benefits are private • Charges to reflect true cost (marginal pricing) • But difficulties of correct pricing, measurement and collection • Subsidised charges (or free provision): • where public benefits are large • for poor (if poor are only/main beneficiaries) • but income subsidies may be better • scope for internal cross-subsidies? • free or subsidised provision may mean no service or inadequate service

  10. Revenue Sharing • National tax revenues may be shared: • by origin: incentive to support tax collection but reinforces inter-LG inequalities, plus problem of assignment to right LG (e.g. VAT) • by formula: redistributive but little incentive • High sharing ratios may reduce CG incentive to improve collection performance • Surcharging on national tax base (tax-base sharing): like local tax but problems of assignment to right LG and inter-LG equity

  11. Intergovernmental Grants • Specific grants: to ensure national priorities • Matching grants: a form of specific grant that encourages LG contribution • Block / General grants: LGs have choice; main means of equalisation (horizontal balance) • Grant formulae to take account of: • relative expenditure needs (various factors) • relative local resource capacity

  12. Grant Formulae • Expenditure needs factors: which ones? • Local revenue capacity: how to assess? • Other factors: regional cost variations, poverty factor, performance related factors • Data availability and reliability (for all LGs) • Incentive / disincentive effects • Simplicity vs. accuracy/equity • Transparency and public trust

  13. Capital Financing and Borrowing • Asset sales • Borrowing • sources, financial institutions • borrowing capacity • municipal bonds • Leasing, deferred purchase • Public-private partnerships: various forms • Community contributions

  14. Closing the Fiscal Gap • Increased efficiency in resource use • Alternative ways to deliver services, e.g. contracting out, privatisation, community provision • Improving revenue collection performance • Improving financial management • financial information systems • accounting systems • auditing: internal. external • budget centres with devolved responsibilities • Use of performance indicators, targets • Public accountability

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