Intergovernmental transfers and decentralized public spending

1. Intergovernmental transfers and decentralized public spending Prof. Dr. C.G.M. Sterks

2. 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

3. Grant definition • Transfer from central government to a sub- national government

4. 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

5. 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

6. 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

7. 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

8. Subsidizing grants • Earmarked matching grants • Stimulation of local or regional cooperation

9. 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

10. 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

11. 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.