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Intergovernmental transfers

Intergovernmental transfers. Taxonomy, objectives and results. Empirical findings of the OECD survey. No clear relation between fiscal autonomy and financial decentralisation The gap between sub-national tax and expenditure shares has been widening

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Intergovernmental transfers

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  1. Intergovernmental transfers Taxonomy, objectives and results

  2. Empirical findings of the OECD survey • No clear relation between fiscal autonomy and financial decentralisation • The gap between sub-national tax and expenditure shares has been widening • A high share of grants is often the result of large horizontal imbalances (tax base and spending needs)

  3. Typology of grants • Non-earmarked • Mandatory • General purpose grants • Block grants • Discretionary • Earmarked • Mandatory • Non-matching grants • Matching grants • Discretionary • Capital grants • Current grants

  4. Use of grants – results of the survey • Resources other than taxes and grants are scarce • Grants are on average 50% for states, regions and provinces • States receive over 6% of GDP in grants (1% in Canada to over 10% in Belgium) • Grants are on average 40% for local governments • Local governments receive on average over 4% of GDP in grants (12.4% in Denmark, to less than 1% in Belgium, Canada, Iceland and Turkey) • The central government is by far the most important source of grants • In some states, international bodies are an important source of grants

  5. Objectives of grants • Financing sub-national services and investments • Subsidisation • Equalisation

  6. Objective 1: Financing • Why choose grants over sub-national taxes? • Central government is better able to control sub-national spending • Sub-national taxes may have distortionary effects • Sub-national taxation may lead to high inequalities • Sub-national taxes may have high administrative and collection costs • Why NOT choose grants over taxes? • Taxes allow sub-national authorities to adapt the level of services to local preferences • Asymmetric information and efficient allocation of resources • Taxes come with increased accountability • Sub-national authorities can’t blame grants for the poor quality of services

  7. Objective 1: Financing Aims of financing grants: • Enable sub-national authorities to finance a basic package of services • Best: non-earmarked general purpose grants • Provide (new) services imposed by the central governement or reach imposed standards • Best: non-earmarked grants

  8. Objective 1: Financing • Distribution criteria • Law-based versus discretionary • Stable and predictable versus buoyant and evolutive • Complex versus simple • Based on norm costs, average costs or actual costs?

  9. Objective 2 - Subsidisation • Aim: compensate for spillover effects • Most efficient: • National spillovers: earmarked matching grants • Regional spillovers: stimulation of horizontal co-operation

  10. Objective 3: Equalisation • Aim: enable sub-national governments to provide similar services at roughly similar tax effort • Types • Equalisation of tax capacity • Equalisation of service capacity (of spending needs) • Best grants: non-earmarked general purpose and horizontal transfers

  11. Equalisation of tax capacity • Solidarity, but also economic reasons (incentive to inefficient migration) • Measure of tax capacity: revenue collected if depleted at a certain uniform (usually average) rate • Caveat: full equalisation removes incentives to increase tax base

  12. Equalisation of service capacity (spending needs) • Solidarity and regional/spatial planning (not economic) reasons • Reasons for inequal cost per unit of service: • Special situation/location • Socio-demographic conditions • Requires calculation of service cost indicators which • Are based on average or norm costs • Cannot be influenced by sub-national authorities

  13. Decision making • Government is a unitary actor that maximizes the social welfare of the nation • But there exists: • Central-local loyalties • Assymetric information • Various forms of lobbying • Critical points in grant design: • Choice earmarked – non earmarked • Distribution formulas • Determining tax and service capacity and equalisation level • Discretionary grants • Efficient decision making: • Neutral expertise • Limit the influence of lobbying • Involve sub-national governments • In a setting that encourages objective debate

  14. Council of Europe acquis • European Charter of Local Self-Government (Art. 9) • Rec(2004)1 on financial and budgetary management at local and regional levels • Rec(2005)1 on the financial resources of local and regional authorities

  15. On-going and planned work in the Council of Europe • Finalisation of a recommendation on the provision of services at local and regional levels • A new general report on local finance in Europe (update of a 1996 report) • Finalisation of reports on: • Accounting rules and practice at local level • Performance management at local level • Internal audit at local level

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