Professor Roy Bahl
Georgia State University
(rbahl@gsu.edu)

 Definitions
 Why Use Transfers
 How To Design A Transfer System
 The Political Economy
2

Definitions
 Intergovernmental transfers
– Grants
– Subsidies
– Shared taxes
 Local taxes
 Piggyback local taxes
3

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
4

Why Have
Intergovernmental Transfers?
5

Justifications for
Intergovernmental Transfers
 Close the “ fiscal gap ”
 Equalize fiscal capacity and need
 Adjust for spillovers
 Increase effectiveness of central expenditures
 Political reasons
6

How To Close A Fiscal Gap
 More Transfers
 More Local Raised Revenue
 Local Expenditure Efficiency
 Re-Assign Expenditure / Responsibility
7

Equalization
 The objective of an equalization transfer should be to protect (or guarantee?) some basic level of services
8

What Do We Equalize?
 Fiscal Capacity
 Expenditure Needs
 Capacity – Needs Gap
9

The Special Case of Natural
Resources Revenue Sharing
10

Natural Resource Revenue
Sharing: The Case for More
Centralization
 The Stability Argument
 The Disparities Argument
 The Local Capacity Argument
 The National Treasure Argument
11

Natural Resource Revenue
Sharing: The Case for More
Decentralization
 The Cost Reimbursement Argument
 The Heritage Argument
 The Conflict Resolution Argument
12

Design Issues For
Intergovernmental Transfers
13

How Can Intergovernmental
Transfers be Decentralizing?
 Revenue Adequacy
 Certainty
 Unconditional
14

How Can Intergovernmental
Transfers be Centralizing?
 No Transparency In Vertical Sharing
 Ad Hoc Distributions
 Uncertainty and Year-To-Year Changes
 Strict Conditions
15

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
A ---- --- Origin of collection of the tax
Formula
Total/partial cost reimbursement
Ad hoc
B
C
D
F
G
H
---
K
---
16

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
17

Goals of Local Government
 Maintain Control over Local Finances
 Plan Efficient Budget
 Increase Adequacy of Local Revenue
Flow
 Minimize Administrative Costs
18

Intergovernmental Grant Lessons
 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?
19

Intergovernmental Grants: How
Not To Do It!
 Deficit Grants
 Complicated Formulae
 No Transparency
 No Continuity
 Base it on The Amount Spent
 No Evaluation
20

The Special Problem of Transition
 The Need for a Phase-In Plan
 Separating the Pieces
 The Learning Curve for Local
Governments
 Hold Harmless Provisions
 Education
 Implementation Planning
 Central Leadership
21

The Political Economy of Transfers
 President
 Parliament
 Ministry of Finance
 MOHA
 Line Ministries
 Urban Local Government
 Rural Local Government
22