Abstract
Flypaper effect and the fiscal interest model have been employed to explain the fiscal behaviour of local government officials in the Central Region of Ghana. Central government transfers or grants have taken dominion over local government expenditure compared with own-source revenues, creating a situation known as the flypaper effect. Using panel data for 17 local governments from 2008 to 2015, the study examined the fiscal behavior of local government officials when presented with intergovernmental fiscal transfers and own-source revenues. The analysis employed the panel data analysis of fixed effects and random effects. However, given the optimal unbiased results, the Generalized Least Squares (GLS) is estimated to account for heteroscedasticity and serial autocorrelation. The results show that central government transfers contribute more to local government expenditure than local governments’ own-source revenues. This situation confirms the flypaper effect on local governments in the Central Region, thus explaining the fiscal behavior of the local governments. Whilst the system of intergovernmental transfers in Ghana has been very successful in directing resources towards the local governments, it may be counterproductive in encouraging the local governments in raising their revenue at the local level as demonstrated by the presence of the flypaper effect.
Highlights
Ghana’s intergovernmental transfers from the Central Government to the Local Governments (called the District Assemblies’ Common Fund (DACF)) was established by Article 252 of the 1992 constitution of the Republic Ghana
Central government transfers or grants have taken dominion over local government expenditure compared with own-source revenues, creating a situation known as the flypaper effect
This paper has argued that local governments which depend on own-source revenue are more autonomous than those that depend on central governments transfers
Summary
Ghana’s intergovernmental transfers from the Central Government to the Local Governments (called the District Assemblies’ Common Fund (DACF)) was established by Article 252 of the 1992 constitution of the Republic Ghana. Being a Development Fund, the DACF uses not less than 5 per cent of the Ghana’s wealth set aside and shared among all the local governments according to a sharing formula approved by the Parliament of the Republic of Ghana. To promote the mobilization of local governments own-source revenues. To support this second point, the sharing formula rewards improvement in own-source revenue mobilization, as captured under responsive factor, reflecting that the DACF is to promote improvement in own-source revenue generation.
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