Priorities for the Distribution of Interbudgetary Transfers Under the Conditions of Fiscal Decentralization in Ukraine

The article is devoted to the problem of the distribution of intergovernmental transfers in Ukraine, taking into account fiscal decentralization trends. To perform the delegated functions, local governments need to have sufficient funding. However, the revenues of local budgets are insufficient to cover all necessary expenses. Therefore, inter-budget transfers, which in Ukraine are the main instrument of financial equalization, play an important role in ensuring the implementation of delegated powers by local governments. The aim of the article is determination of the priorities for the distribution of intergovernmental transfers in Ukraine in the context of fiscal decentralization. The research methodology combines quantitative and qualitative methods. Using quantitative methods, the principles of fiscal decentralization in Ukraine are observed through the mechanism of distribution of intergovernmental transfers. Using high-quality methods and based on the analysis, the priorities of the distribution of inter-budget transfers in the context of fiscal decentralization are formulated. An analysis of foreign publications on fiscal decentralization has shown that the uncertainty of priorities in this area reduces the effectiveness of fiscal decentralization and inhibits the economic development of regions. Prioritization of the distribution of intergovernmental transfers is preceded by the definition of principles for the distribution of intergovernmental transfers. Based on the results of a quantitative analysis, namely, the identified dynamics of fiscal decentralization indicators and the impact of the distribution of intergovernmental transfers on economic development, the following priorities for the distribution of intergovernmental transfers in fiscal decentralization are identified: supporting the prevalence of targeted transfers over non-targeted transfers, increasing the share of capital transfers, increasing the accountability of local authorities self-government regarding the use of funds received in the form of intergovernmental budget transfers

Fiscal Illusion at the Local Sphere: An Empirical Test of the Flypaper Effect using South African Municipal Data

Despite South Africa’s relatively decentralized governance and administrative structure, an important feature of the country’s intergovernmental fiscal relations system is the gap that exists between the expenditure responsibilities of sub-national authorities and their assigned revenue bases. The resulting vertical fiscal imbalance is mainly addressed via significant intergovernmental transfers to provinces and local governments. This factor presents strong a priori grounds in assuming that in the South African context, the heavy dependence of many local governments on intergovernmental transfers may generate fiscal illusion. Despite this, no significant effort has been geared towards an empirical investigation of the issue of fiscal illusion. This paper extends existing literature on the empirical analysis of fiscal illusion by using the fiscal year 2005/06 financial and expenditure data from 237 local government authorities in South Africa to evaluate the flypaper variant of the fiscal illusion hypothesis. Empirical results indicate that the marginal effects of municipal own-source revenues on local expenditure exceed those of intergovernmental transfers. This outcome yields no statistical evidence in support of the flypaper hypothesis within the context of municipal expenditures in South Africa.Intergovernmental Transfers; Fiscal Illusion; Flypaper E¤ect; South Africa

Intergovernmental transfers and fiscal effort in Peruvian local governments

The purpose of this paper is to identify the causal relationship between intergovernmental transfers and fiscal effort. Empirical evidence from Peruvian municipalities supports a negative relation. The substitution effect is decreasing on the level of municipalities’ expenditure and tends to disappear for high-expenditure localities. Given this phenomenon, devolving responsibilities to sub-national governments might reduce fiscal effort and deteriorate fiscal balance especially among localities with lower fiscal capacity. A possible solution might be the inclusion of fiscal effort indicators in the intergovernmental transfer design.fiscal effort; intergovernmental transfers; fiscal decentralization; local taxation

Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison

A large panel of German municipalities is employed in order to investigate the dynamic fiscal policy adjustment of local jurisdictions using a VEC model which explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of adjustment takes place by offsetting changes in intergovernmental transfers, in particular, in ‘fiscal equalization’ transfers: in present value terms about 34 cents of a one euro decrease in own revenue is compensated by subsequent changes in equalization transfers. The contribution of intergovernmental transfers to restoring fiscal balance, therefore, is about two to three times higher, compared to the case of US municipalities investigated by Buettner and Wildasin (2006). Nevertheless, budget components such as own revenues and general expenditures display larger fluctuations in the German case. This is consistent with the view that fiscal equalization transfers create a moral-hazard problem.Fiscal balance; Intergovernmental transfers; Local governments; Fiscal equalization

Are Intergovernmental Grants Tactical? The Evidence from Russia

Two hypotheses about the determinants of Russian intergovernmental grants are tested empirically. According to first hypothesis, federal transfers to regions correlate with recent voting behavior of regional electorates. Second hypothesis states that transfers are higher in regions with politically powerful governors. We find a strong confirmation for the first hypothesis and no evidence for the second for years 1995-1998. This result is robust across specifications. Panel data analysis allows us to control for regional fixed effects. However, in years 1999-2001 election variables show no effect on transfers. It appears that in the nineties transfers were used by the incumbent government to enhance its reelection probabilities, while by the end of the century this mechanism was no longer in use as the transfer system has become more transparent and objective.Redistributive politics, intergovernmental grants, Russia

The impact of intergovernmental transfers on local revenue generation in Africa: Evidence from Tanzania

Do intergovernmental transfers reduce revenues collected by local government authorities (LGAs)? There is already a well-established body of literature in public finance, which argues that intergovernmental grants 'crowd out' local revenues. Most existing studies, however, explore the fiscal implications of intergovernmental transfers in high-income countries where sound fiscal systems are taken for granted. In this paper, I explore the impact of intergovernmental transfers on local revenues in sub-Saharan Africa, a region where local fiscal capacity is limited and endogenously determined by financial support from international donors and the central government. I argue that in places where the existing capacity of LGAs to administer tax collection is weak and political costs of enforcing taxation are low - which are perennial features of many rural districts in Africa - intergovernmental transfers facilitate local revenue generation instead of undermining it. Analysing newly available quarterly fiscal data on local revenues in Tanzania, I show that intergovernmental grants improve the mobilization of local revenues, and also that the positive effect of fiscal transfers on local revenue collection is particularly pronounced in rural districts

Evaluating fiscal equalization in Indonesia

This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesia's evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesia's recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAU's horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent-on the order of US$ 3.9 billion-of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries.Economic Theory&Research,Public Sector Management and Reform,Fiscal Adjustment,Regional Governance,Urban Governance and Management

A multiregion general equilibrium analysis of fiscal consolidation in South Africa:

A multiregion applied general equilibrium model is used to examine the financial interactions among spheres of government in the context of fiscal consolidation. The framework combines nine regional submodels interacting through the trading of goods and services and the mobility of labor and capital. The model integrates intergovernmental fiscal transfers, which play an important role in reducing the disparity in living standards between regions. The analysis demonstrates that the current intergovernmental revenue transfer system has significant inter- and intraregional equity effects, although its nationwide impact is less important. Reducing intergovernmental transfers leads to a reduction in welfare in the four regions where the net transfers were initially positive (Limpopo, Eastern Cape, KwaZulu-Natal, and North West Province). In contrast, welfare increases in the five other regions (Northern Cape, Mpumalanga, Free State, Gauteng, and the Western Cape). When transfer revenues fall and, consequently, regional and local government revenues drop, poor households are the most affected, as they depend more on public services that are essentially financed by governments. When the government's fiscal position improves, it is also poor households that benefit more from additional government expenses.intergovernmental transfer, multiregion applied general equilibrium, consolidation, welfare,

Does the system of allocation of intergovernmental transfers in Senegal eliminate politically motivated targeting?

While there is a large body of literature on the determinants of allocation of intergovernmental …fiscal transfers in developed countries, this kind of study is still very limited for developing countries, especially Subsaharan countries. Using an original micro-level public fi…nance panel data from Senegal, we address three issues: (1) Does the Senegalese allocation system of …fiscal transfers conform to the guidance of the normative theory, in particular, to the equity principle? (2) Does this allocation system eliminate the politically motivated targeting of transfers? (3) If not, what kind of political factors explain the horizontal allocation of resources? By estimating a panel data for 67 local gov- ernments ("communes"), from 1997 to 2009, we fi…nd that equity concerns do not affect the allocation of intergovernmental transfers in Senegal, leading to the conclusion that the resources distribution system does not comply with the dictates of normative theory. Moreover, we …find evidence that political considerations influence the horizontal allocation of …fiscal transfers. In particular, our analysis suggests that transfers allocation follows a pattern of tactical redistribution more than patronage, swing communes being targeted while partisan communes are not.decentralization;political economy;Intergovernmental transfers;senegal