4.6 Fiscal decentralization

Fiscal decentralization shifts financial power from central to local governments, aiming to improve public services and economic efficiency. This concept involves redistributing revenue generation, expenditure responsibilities, and fiscal autonomy across different levels of government.

Understanding fiscal decentralization is crucial for urban fiscal policy. It impacts how cities fund essential services, allocate resources, and address community needs. The process operates across multiple government tiers, each with distinct roles in shaping urban development and service delivery.

Concept of fiscal decentralization

• Fiscal decentralization redistributes financial responsibilities and decision-making power from central to lower levels of government
• Plays a crucial role in urban fiscal policy by empowering local authorities to address specific community needs and allocate resources efficiently

Definition and core principles

Top images from around the web for Definition and core principles

• 

  Fiscal Decentralization and Government Expenditure Efficiency in Indonesia: A Malmquist ... View original

  Is this image relevant?

• 

  Impacts of Fiscal Decentralization and Economic Growth: A Meta-Analysis Approach - Research leap View original

  Is this image relevant?

• 

  Research on Fiscal Decentralization, Local Government’s Behavior Preference and Technology ... View original

  Is this image relevant?

• 

  Fiscal Decentralization and Government Expenditure Efficiency in Indonesia: A Malmquist ... View original

  Is this image relevant?

• 

  Impacts of Fiscal Decentralization and Economic Growth: A Meta-Analysis Approach - Research leap View original

  Is this image relevant?

1 of 3

Top images from around the web for Definition and core principles

• 

  Fiscal Decentralization and Government Expenditure Efficiency in Indonesia: A Malmquist ... View original

  Is this image relevant?

• 

  Impacts of Fiscal Decentralization and Economic Growth: A Meta-Analysis Approach - Research leap View original

  Is this image relevant?

• 

  Research on Fiscal Decentralization, Local Government’s Behavior Preference and Technology ... View original

  Is this image relevant?

• 

  Fiscal Decentralization and Government Expenditure Efficiency in Indonesia: A Malmquist ... View original

  Is this image relevant?

• 

  Impacts of Fiscal Decentralization and Economic Growth: A Meta-Analysis Approach - Research leap View original

  Is this image relevant?

1 of 3

• Transfer of fiscal powers from central to subnational governments
• Encompasses revenue generation, expenditure responsibilities, and fiscal autonomy
• Based on the principle of subsidiarity assigning functions to the lowest capable level of government
• Aims to improve public service delivery and economic efficiency
• Involves four main pillars expenditure assignment, revenue assignment, intergovernmental transfers, and subnational borrowing

Historical context and evolution

• Emerged in the mid-20th century as a response to centralized governance limitations
• Gained prominence in the 1980s and 1990s with the wave of democratization and economic reforms
• Influenced by theories of fiscal federalism and public choice economics
• Evolved from simple delegation of tasks to comprehensive fiscal empowerment of subnational entities
• Shaped by technological advancements enabling better local data collection and management

Levels of fiscal decentralization

• Fiscal decentralization operates across multiple tiers of government, each with distinct roles and responsibilities
• Understanding these levels is crucial for implementing effective urban fiscal policies and ensuring balanced development

National vs subnational governments

• National government retains control over macroeconomic stability, defense, and foreign policy
• Subnational governments gain authority over local public services and regional development
• Revenue sharing arrangements determine the fiscal capacity of each level
• Intergovernmental transfers bridge the gap between national and subnational fiscal resources
• Constitutional or legal frameworks define the division of powers and responsibilities

State vs local authorities

• States or provinces often have intermediate fiscal powers and responsibilities
• Local authorities (municipalities, counties) focus on immediate community needs and services
• Vertical fiscal imbalances can occur between state and local levels
• Revenue-raising capabilities typically increase at higher levels of government
• Cooperative federalism promotes collaboration between state and local authorities in service delivery

Revenue assignment

• Revenue assignment determines how different levels of government generate and collect financial resources
• Critical for urban fiscal policy as it impacts the ability of cities to fund essential services and infrastructure

Tax base allocation

• Assigns specific tax bases to different levels of government
• Property taxes often allocated to local governments due to immobile nature
• Income and sales taxes typically shared between national and subnational levels
• Consideration of tax elasticity and stability in allocation decisions
• Aims to match revenue sources with expenditure responsibilities at each level

Intergovernmental transfers

• Financial flows from higher to lower levels of government
• Include both conditional (earmarked) and unconditional grants
• Equalization transfers address fiscal disparities among regions
• Can create soft budget constraints and reduce local fiscal effort
• Formulas for distribution often based on population, poverty levels, or fiscal capacity

Local revenue generation

• Empowers local governments to raise own-source revenues
• Includes local taxes, user fees, and charges for services
• Promotes fiscal accountability and responsiveness to local needs
• Challenges include limited tax bases and collection capacity in some areas
• Innovative financing mechanisms (value capture, municipal bonds) expand local revenue options

Expenditure responsibilities

• Allocation of spending duties across government levels shapes the delivery of public services
• Crucial for urban fiscal policy in determining which level of government provides and funds various urban services

Service provision allocation

• Assigns responsibility for delivering specific public services to different government levels
• Local governments typically handle services like waste management and local road maintenance
• Regional or state governments often manage secondary education and regional transportation
• National government retains control over services with nationwide impact (defense, social security)
• Consideration of economies of scale and scope in service allocation decisions

Matching principle

• Aligns the jurisdiction of service provision with its beneficiaries
• Ensures those who benefit from a service bear its costs
• Promotes efficient resource allocation and reduces free-rider problems
• Challenges arise with services having spillover effects across jurisdictions
• May require inter-jurisdictional cooperation or higher-level government involvement for certain services

Spillover effects

• Occur when benefits or costs of a service extend beyond the providing jurisdiction
• Positive spillovers (education) may lead to underprovision without intervention
• Negative spillovers (pollution) may result in overprovision if not internalized
• Intergovernmental grants or regional cooperation can address spillover issues
• Requires careful consideration in urban policy to ensure optimal service levels across metropolitan areas

Fiscal autonomy

• Degree of independence subnational governments have in fiscal decision-making
• Essential for effective urban fiscal policy as it determines local governments' ability to respond to urban challenges

Decision-making authority

• Extent to which subnational governments can make independent fiscal choices
• Ranges from full autonomy to heavily constrained decision-making
• Includes authority over tax rates, bases, and expenditure priorities
• Influenced by legal frameworks and intergovernmental relations
• Balances local discretion with national policy objectives and standards

Budget control

• Ability of subnational governments to formulate and execute their budgets
• Encompasses revenue forecasting, expenditure planning, and fiscal management
• May include restrictions on deficit spending or balanced budget requirements
• Transparency and accountability mechanisms crucial for effective budget control
• Capacity building often necessary to ensure sound local financial management

Borrowing capacity

• Subnational governments' ability to access credit markets and issue debt
• Important for financing large-scale urban infrastructure projects
• Often subject to regulatory limits to prevent excessive subnational debt
• May include market-based discipline or central government oversight
• Requires consideration of long-term fiscal sustainability and intergenerational equity