Intergovernmental Transfers

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Intergovernmental Transfers

• Professor Roy BahlGeorgia State
  University(rbahl_at_gsu.edu)

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• Definitions
• Why Use Transfers
• How To Design A Transfer System
• The Political Economy

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Definitions

• Intergovernmental transfers
• Grants
• Subsidies
• Shared taxes
• Local taxes
• Piggyback local taxes

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Definitions Types of Intergovernmental Transfers

• Unconditional or general
• Conditional or specific (for capital and/or
  operating expenditures)
• Non-matching
• Matching
• Open-ended
• Close-ended
• Direct cost reimbursement

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• Why Have
• Intergovernmental Transfers?

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Justifications for Intergovernmental Transfers

• Close the fiscal gap
• Equalize fiscal capacity and need
• Adjust for spillovers
• Increase effectiveness of central expenditures
• Political reasons

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How To Close A Fiscal Gap

• More Transfers
• More Local Raised Revenue
• Local Expenditure Efficiency
• Re-Assign Expenditure / Responsibility

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Equalization

• The objective of an equalization transfer should
  be to protect (or guarantee?) some basic level of
  services

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What Do We Equalize?

• Fiscal Capacity
• Expenditure Needs
• Capacity Needs Gap

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• The Special Case of Natural Resources Revenue
  Sharing

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Natural Resource Revenue Sharing The Case for
More Centralization

• The Stability Argument
• The Disparities Argument
• The Local Capacity Argument
• The National Treasure Argument

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Natural Resource Revenue Sharing The Case for
More Decentralization

• The Cost Reimbursement Argument
• The Heritage Argument
• The Conflict Resolution Argument

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• Design Issues For Intergovernmental Transfers

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How Can Intergovernmental Transfers be
Decentralizing?

• Revenue Adequacy
• Certainty
• Unconditional

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How Can Intergovernmental Transfers be
Centralizing?

• No Transparency In Vertical Sharing
• Ad Hoc Distributions
• Uncertainty and Year-To-Year Changes
• Strict Conditions

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Alternative Forms of Intergovernmental Transfers
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Goals of Central Government

• Control Local Finances
• Equalize Services and Fiscal Capabilities among
  Localities
• Stimulate Expenditures for a Particular Function
  or Overall Tax Effort
• Increase Local Tax Effort
• Minimize Administrative Costs

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Goals of Local Government

• Maintain Control over Local Finances
• Plan Efficient Budget
• Increase Adequacy of Local Revenue Flow
• Minimize Administrative Costs

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Intergovernmental Grant Lessons

• Desired outcomes should drive design
• One grant/transfer instrument cannot accomplish
  multiple objectives
• Expect changes over time
• Is distributable pool a discretionary element
  in the central budget or an entitlement of local
  government?

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Intergovernmental Grants How Not To Do It!

• Deficit Grants
• Complicated Formulae
• No Transparency
• No Continuity
• Base it on The Amount Spent
• No Evaluation

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The Special Problem of Transition

• The Need for a Phase-In Plan
• Separating the Pieces
• The Learning Curve for Local Governments
• Hold Harmless Provisions
• Education
• Implementation Planning
• Central Leadership

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The Political Economy of Transfers

• President
• Parliament
• Ministry of Finance
• MOHA
• Line Ministries
• Urban Local Government
• Rural Local Government