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Strengthening Capacity for Effective Public Spending: Institutional Arrangements and Sub-national Finance

This report explores the importance of institutional arrangements and sub-national finance in enhancing the effectiveness of public spending. It discusses the use of contracts and inter-ministerial commissions, as well as strategies for improving the delivery of local public services and governing regional development policy. The report also examines funding arrangements, budget rules, and mechanisms for strengthening sub-national capacities.

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Strengthening Capacity for Effective Public Spending: Institutional Arrangements and Sub-national Finance

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  1. BUILDING THE CAPACITY FOR EFFECTIVE PUBLIC SPENDING Institutional arrangements and sub-national finance Visit of Mexican Legislators On Fiscal Policy and Public Finance OECD Headquarters, Paris 26 March 2007 Claire Charbit and Lee Mizell OECD Regional Competitiveness and Governance Division

  2. Governance of Regional Development Policy • In all national case studied, RDP is a shared responsibility …often employing contractual mechanisms for dealing with co-ordination needs (e.g. France, Italy, Spain, Canada, Germany) • A contract between levels of government is any arrangement reorganising, beside the constitution, the rights and duties of governments • Contracts among levels of government are unavoidable (vertical interdependencies + assignment of responsibilities) • Contracts allow a customized management of interdependencies, useful in either unitary or federal contexts • Contracts are tools for dialog, for clarifying responsibilities, for learning • Bilateral commitments must be as « verifiable » as possible • Coherence of Regional Policy is needed for improving public spending.

  3. Coherent institutional arrangements Strong sub-national finances Effective administrative capacity Effective place-based spending rests on three important pillars … at all levels of government

  4. SENER SCT SEMARNAT SAGARPA SECONOMIA “gatekeeper” + resources + authority SEDESOL SHCP • Inter-ministerial commission (proposed) • (Comisión Interinstitucional para el Desarrollo Nacional y Regional) CHALLENGE 1: Developing coherence by enhancing institutional arrangements • Sub-secretariat (e.g. Italy before) ; Single ministry (e.g. Italy present) • Agency model (e.g. Canada)

  5. Fiscal Federalism Issues and Institutional Concerns • Local Public Services are absolutely required for social and economic development • Who provide them and with what type of budget? • Providing basic services more effectively allow for available funds for economic development support • What strategies are used by OECD countries for improving effectiveness of local public services delivery? • Place based approaches require the participation of different levels of government • What are the mechanisms used by OECD countries for governing regional development policy?

  6. Sub national governments' share in general government revenues and expenditure; per cent (2003) Fiscal Autonomy and Fiscal Decentralisation Revenues Expenditures

  7. Effectiveness of Sub Central Public Spending • Funding arrangements and budget rules • Types of grants (earmarked vs. general purpose) • Multi-year budgeting • Competition and other market-based mechanisms • On Supply side (less monopolistic behaviours thanks to competitive tendering for public procurement), and • on Demand side (more user fees) • The relevant size for organising local public service provision • Mergers vs. cooperation • Central government incentives • Urban and rural considerations • Indicators to measure performance • Evaluation • Incentives

  8. Set aside unique funding • Prioritize multi-year expenditures • Enhance use • Requires sub-national own-source revenue • Increase incentives to raise sub-national revenue • Strengthen accountability for earmarked grants CHALLENGE 2: Strengthening finances for place-based policies 3 categories of challenges • Funding at the national level • Co-financing for regional development • EU Structural Funds • Fiscal relations among levels of government • Low own-source revenue

  9. CHALLENGE 3: Strengthening sub-national capacities • Professional workforce • Extend LSPC to all public servants • Continue extension of similar reforms at sub-national levels • Management of diverse stakeholders • Assess and strengthen existing mechanisms • Monitoring and evaluation • Build sub-national capacities for monitoring and evaluation • Extend evaluation to mechanisms of co-ordination • Diffuse good practice • Proposed regional development agencies could provide forum • Accountability • Strengthening capacities – including sub-national finance – improves accountability

  10. Sub-national tax revenue in Mexico accounts for ~3% of total tax revenue Distribution of total tax revenue by sub-sector of government, 2004 Source: OECD (2006), Revenue Statistics Note: (1) VAT is collected by the federal government and all receipts are appropriated to States and territories

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