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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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Close the “fiscal gap” Equalize fiscal capacity and need Adjust for spillovers Increase effectiveness of central
expenditures Political reasons
Justifications for Intergovernmental Transfers
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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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The objective of an equalization transfer should be to protect (or guarantee?) some basic level of services
Equalization
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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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The Stability Argument
The Disparities Argument
The Local Capacity Argument
The National Treasure Argument
Natural Resource Revenue Sharing: The Case for More
Centralization
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The Cost Reimbursement Argument
The Heritage Argument
The Conflict Resolution Argument
Natural Resource Revenue Sharing: The Case for More
Decentralization
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Design Issues For Intergovernmental Transfers
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Revenue Adequacy
Certainty
Unconditional
How Can Intergovernmental Transfers be Decentralizing?
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No Transparency In Vertical Sharing
Ad Hoc Distributions
Uncertainty and Year-To-Year Changes
Strict Conditions
How Can Intergovernmental Transfers be Centralizing?
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Alternative Forms of Intergovernmental Transfers
Method of determining total to be distributed
Method of allocating total among eligible units
Specified share of central tax
Ad hoc decision
Reimbursement of approved expenditures
Origin of collection of the tax
A ---- ---
Formula B F ---
Total/partial cost reimbursement
C G K
Ad hoc D H ---
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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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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?
Intergovernmental Grant Lessons
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Deficit Grants Complicated Formulae No Transparency No Continuity Base it on The Amount Spent No Evaluation
Intergovernmental Grants: How Not To Do It!
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The Need for a Phase-In Plan Separating the Pieces The Learning Curve for Local
Governments Hold Harmless Provisions Education Implementation Planning Central Leadership
The Special Problem of Transition
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The Political Economy of Transfers
President Parliament Ministry of Finance MOHA Line Ministries Urban Local Government Rural Local Government