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Framework for Fiscal Decentralization. Professor Roy Bahl Georgia State University (rbahl@gsu.edu). Fiscal Decentralization Three Things to Think About. What is it? Why do it? How to do it?. What is Fiscal Decentralization. Empowering People By Empowering Their Local Governments.
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Framework for Fiscal Decentralization Professor Roy BahlGeorgia State University(rbahl@gsu.edu)
Fiscal DecentralizationThree Things to Think About • What is it? • Why do it? • How to do it?
What is Fiscal Decentralization • Empowering People By Empowering Their Local Governments
Why Do It? • What Is To Be Gained?
Why Decentralization? • Economic Development • Elected Government • Inefficient Centralization • Uniformity Not Acceptable • Local Government Capacity • Autonomy v. Backdoor Approaches • Poor Service Delivery
The Benefits • Better Local Services • Citizen Participation • Increased Revenue • Develop Local Capacity
What is Necessary to Capture the Benefits of Fiscal Decentralization • Elected councils and chief local officers • Local taxing powers • Significant, clear, expenditure responsibility and autonomy • Hard budget constraints and less central paternalism • Central government leadership • A champion
The Arguments for Fiscal Centralization • Macroeconomic Control, Stabilization Policy • Direction of Investment in Social Overhead • Equalization Potential • Central Competence and Honesty • Reduces Central Bureaucratic Control
What Kinds of Countries Choose Decentralization? • Large • More developed • More heterogeneous • Internal discord and natural resources
How To Implement Fiscal Decentralization
The Process for Decentralization (Theory) • National Debate, White Paper • Develop A Detailed Plan • The Law • Implementing Rules, Regulations • Implementation • Monitor/Evaluate
Rules 1. Intergovernmental Fiscal Relations (Fiscal Decentralization) is a system, and all of the pieces must fit together.
Rules (cont’d) 2. First, fix the assignment of expenditures, then assign revenues in amount that will correspond to the expenditure needs.
Rules (cont’d) 3. Begin fiscal decentralization with a strong central ability to monitor.
Rules (cont’d) 4. One system will not fit the urban and rural sectors.
Rules (cont’d) 5. Accountability of local government officials requires significant local fiscal autonomy. Urban local governments must have some taxing powers.
Good Local Tax Bases • Payrolls, Wages • Property, Land Value • Motor Vehicles • Business Activity • User Charges
Rules (cont’d) 6. The central government must honor its commitment to decentralization by following the rules it makes.
Rules (cont’d) 7. Keep it simple. Precision in tax administration and grant distribution is probably not possible in most cases.
Rules (cont’d) 8. Grants and shared taxes must play an important role in almost any decentralized fiscal system in a developing or transition country. Transfers may be designed as more centralized or more decentralized.
Rules (cont’d) 9. There is an intraprovince dimension to intergovernmental fiscal relations and this should be taken into account in planning the system.
Rules (cont’d) 10. Impose a hard budget constraint on local governments.
Rules (cont’d) 11. Recognize that intergovernmental systems are always in transition, and plan for this.
Rules (cont’d) 12. There must be a champion.
