Introduction to Fiscal Decentralization

Three Economic Roles of Government Equitable Distribution of Income Stable Economic Environment Efficient Allocation of Resources

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

Advantages of Fiscal Decentralization Move Government closer to the people Broaden the Tax Base Allow for alternative service delivery in social services

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

Components of System of Fiscal Decentralization Desirable Conditions –Freedom from Excessive Central Expenditures Mandates –Unconditional Transfers from Higher Level Governments –Borrowing Powers

Five Building Blocks of Fiscal Decentralization

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

Expenditure Assignments Functions and Services Performed by Subnational Units –Education –Health –Transportation –Social Services –Land Use Planning

Revenue Assignments Local Taxes and Fees Own Source Revenues Shared Revenues

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

Subnational Borrowing Loans –(short term debt) Debt Issuance (Bonds) –Long Term Debt for Infrastructure

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

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