Intergovernmental transfers and decentralized public spending Prof Dr
Intergovernmental transfers and decentralized public spending Prof. Dr. C. G. M. Sterks
Overview • Grant definition • Aim of the paper – Analysis statistical data / types of grants – Analysis of basic principles of grant design – Indicate how to deal with implementation problems • Short comment
Grant definition • Transfer from central government to a subnational government
Statistical data / types of grants (1) • Empirical significance – 1985 -2000 increased dependence on grants • Unwillingness to increase sub-national tax base • Correction of horizontal imbalances • Financial incentives for sub-national spending • Types of grants – Useful overview Figure 3 • Choices made – Great deal of variation
Basis principles of grant design • Objectives of grants – Financing grants as an alternative to enlarge sub -national tax base – Subsidization grants to compensate for spillover effects – Equalization grants to provide average package of services at same tax effort
Financing grants (1) • Aims – To enable sub-national jurisdictions to finance a basis package of services – To provide resources needed to supply programmes imposed by central government or to reach imposed minimum standards • Distribution formulas – Preferably simple formulas based on normative costs
Financing grants (2) • Related issues – Need to collect performance information – Need to cope with volatility problems to increase predictability for planning purposes – Need to avoid pro-cyclical effects
Subsidizing grants • Earmarked matching grants • Stimulation of local or regional cooperation
Equalization grants • Equalization of tax capacity – To compensate for relatively small tax bases – Needs calculation of tax capacity – Full compensation to be avoided (incentive effects) • Equalization of service capacity – To compensate for relatively high costs – Needs calculation of service costs indicators • Equalization can be achieved via horizontal grants and via corrections upon financing grants
Implementation problems • Use insights from public choice theory, principal agent theory and economics of information • Constrain volatility by linking to trend estimates • Limit room for strategic behavior • Take institutional, historical and cultural circumstances into account
Short comment • Use of same grant for various purposes is seen as an important cause of inefficiency (see page 4) • No clear solution is presented for that problem • General purpose grants can at the same time be based on financing, equalization and subsidization purposes.
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