Finding the right balance in the use of conditional grants

Abstract

Discussions on the design of intergovernmental fiscal relations often revolve around the premise that intergovernmental grants – especially earmarked grants – should be minimised. It is also often argued that intergovernmental grants imply a vertical fiscal imbalance between central and subnational governments. These arguments are based on the “benefit principle”, and emphasise the importance of establishing a clear linkage between expenditure and revenue decisions of subnational governments. But in reality, almost all local governments worldwide provide, at least to some extent, essential (redistributive) public services such as health, education, and social services, which require substantial revenues. The four country cases examined in this chapter show the importance of intergovernmental relations in the role of co-ordinating across levels of government for the efficient and equitable provision of essential public services. They also show that, in many countries, earmarked grants play an important role in the provision of these services.