Federal Transfers Research Articles

Subnational Sustainable Development: The Role of Vertical Intergovernmental Transfers in Reaching Multidimensional Goals

Achieving sustainable development hinges on two critical factors: the subnational implementation of public policies and the efficient allocation of resources across regions through vertical intergovernmental transfers. We introduce a framework that links these two mechanisms for analyzing the impact of reallocating federal transfers in the presence of regional heterogeneity from development indicators, budget sizes, expenditure returns, and long-term structural factors. Our study focuses on the case of Mexico and its 32 states. Using an agent-based computational model, we estimate the development gaps that will remain by the year 2030, and characterize their sensitivity to changes in the states' budget sizes. Then, we estimate the optimal distribution of federal transfers to minimize these gaps. Crucially, these distributions depend on the specific development objectives set by the national government, and by various interdependencies between the heterogeneous qualities of the states. This work sheds new light on the complex problem of budgeting for the Sustainable Development Goals at the subnational level, and it is especially relevant for the study of fiscal decentralization from the expenditure point of view.

Finances of the Nation: Provincial Debt Sustainability in Canada: Demographics, Federal Transfers, and COVID-19

In this article, Trevor Tombe examines the sustainability of Canada's public debt in the face of steadily rising provincial debt, a severe economic shock from COVID-19, and mounting health-care costs associated with an aging population. He finds that while the federal debt is solidly sustainable, despite a large increase owing to COVID-19, the debt burden of most provincial governments is not. He discusses some of the policy options available to improve fiscal outlooks, focusing in particular on reform of federal transfers.

Subordinating Federal Transfers: Analysis of Fiscal and Electoral Policies in Russian Regions in 2013-2018

Subordinating Federal Transfers: Analysis of Fiscal and Electoral Policies in Russian Regions in 2013-2018

Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States

Partisanship of state level politicians affect the impact of federal fiscal policy in the U.S. Using data from close gubernatorial elections, we find partisan differences in the marginal propensity to spend federal transfers since the early 1980's: Republican governors spend less. A New Keynesian model of partisan states in a monetary union implies sizable aggregate income effects from these partisan differences. First, the transfer multiplier would rise by 0.60 if Republican governors were to spend as much from federal aid as do Democratic governors. Second, the observed changes in the share of Republican governors imply variation in the fiscal multiplier of 0.40. Local projection regressions support this prediction.

Фискальное воздействие пандемии COVID-19 на регионы России: обзор федеральных мер поддержки

The Russian regions were negatively affected by the COVID-19 pandemic in 2020. In most regions, corporate income tax revenues and small business tax revenues significantly declined, while heath care and social policy expenditures increased. The federal government responded to this challenge by increasing federal transfers to regions by roughly 50% compared to 2019 (up to 3,8, trill RUB.) Despite significant federal fiscal support, many transfers were nontransparent and irregular, while the structure of intergovernmental transfers and the strategy used by the federal government were changing considerably throughout the year. In this article, we analyze the structure of federal fiscal support to the regions and compare the largest intergovernmental transfers in 2020 and 2019 by their type (unconditional transfers, subsidies, subventions, and other transfers). We pay particular attention to non-transparent forms of federal fiscal support, namely, discretionary unconditional transfers and other transfers from the reserve fund of the Russian federal government.

The Effect of an Income Shock on Subnational Debt: Micro Evidence from Mexico

This paper examines how the borrowing decisions of local governments, often financially constrained, respond to a shock that affects the distribution of revenue from the central government. The shock stems from the discrete updating of population census data that is plausibly uncorrelated with short-term financing needs. For a one-standard-deviation increase in the population shock, I find that federal transfers to Mexican municipalities increase by 3% over the first two post-census years. Using supervisory loan-level data, I show that the probability of municipalities being indebted declines by 0.2 percentage points over the same period. This response is driven by governments with relatively more own-source revenue and, hence, less dependent on transfers, which lenders perceive as more creditworthy. The shock has no differential effect when debt is granted by a public lender, not even during electoral years or when the mayor is political aligned with the central government. Most of the additional revenue goes to finance short-term, current expenditures, especially by the more transfer-dependent governments. These findings reveal a small capacity to smooth shocks in credit markets, restricted to few governments with a diversified revenue base that borrow from private intermediaries.

ВОЗМОЖНОСТИ ДЕЦЕНТРАЛИЗАЦИИ В ГОД ПАНДЕМИИ: ЧТО ПОКАЗЫВАЕТ БЮДЖЕТНЫЙ АНАЛИЗ?

In the year of the pandemic transfers from the federal to the regional budgets increased by 50 per cent which led to an increase in budget revenues in most regions and made regional budgets more dependent on federal support. The proportion of earmarked transfers (subventions and subsidies) increased, making reassignment of budgetary funds difficult. The regions were forced to spend additional money on designated projects only, which resulted in further centralisation of budget management. The transfer calculation became less transparent, additional transfers were not linked to the decrease in regional budgets’ own revenues. Before the pandemic, «geopolitically» important regions had been prioritised for federal transfers. In 2020 interpretation of transfer distribution became much more difficult due to the lack of coordination between various federal ministries in their transfer calculations. Budget federalism in Russia had been limited to some freedom in choosing expenditure priorities for the regions, but in the year of the pandemic these opportunities dwindled. Health expenditure and social protectionbecame common priorities because a lot of additional transfers were earmarked for these purposes. Other regional priorities differed but most regions subsidised utility tariffs and increased spending on national economy in order to reach targets of the Presidential Decree. Hopes of decentralisation of the Russian budget system during the pandemic did not come true and regional dependence on the federal authorities increased.

Revitalizing the Generation-Skipping Transfer Tax

Congress first enacted the generation-skipping transfer (GST) tax in 1976 to protect the estate and gift tax base and to ensure that extraordinary fortunes would bear their fair share of the transfer tax burden. Nearly a half-century into the life of the GST tax, those goals remain unrealized. In recent decades, high-net-worth individuals have succeeded in shifting hundreds of billions of dollars to “dynasty trusts” that—under current law—are poised to escape federal wealth transfer taxation indefinitely. The rise of dynasty trusts reduces the revenue-raising potential of the estate and gift taxes and allows a privileged class to exert vast economic and political power based solely on an accident of birth. This white paper presents a legislative reform agenda designed to reinvigorate the GST tax, stem the rise of dynasty trusts, and bring hundreds of billions of dollars back within the federal transfer tax base. We highlight three flaws in current law that account for the GST tax’s failure: (1) very high exemption amounts; (2) loopholes that allow high-net-worth taxpayers to stuff GST-exempt trusts with assets worth many multiples of the exemption amount; and (3) the lack of any durational limit on dynasty trusts in states that have abolished the rule against perpetuities. Our three-part reform agenda addresses each of these flaws. First, we propose a reduction in the GST exemption from the current level ($11.7 million) to the 2009 level ($3.5 million). A $3.5 million GST exemption still would be higher, in inflation-adjusted terms, than the exemption amount advocated by the Reagan administration. Second, we propose a set of common-sense loophole closers that would prevent high-net-worth taxpayers from stuffing GST-exempt trusts with assets worth far more than the exemption amount. Third, we propose to limit the maximum duration of a trust’s GST exemption to two generations, with an exception that would allow tax-free distributions to beneficiaries who were alive at the time of the trust’s inception. Our plan would shore up the estate and gift tax base and stem the rise of dynasty trusts while allowing more than 99 percent of American families to pass wealth across multiple generations tax-free.

The impact of infrastructure investments on income inequality: Evidence from US states

AbstractOur analysis of US state‐level data on an annual frequency, from 1976 to 2008, sheds new light on a plausible causal link between infrastructure investments, namely public spending on highways, and income inequality. This causal relationship is drawn out using the number of seats in the US House of Representatives Committee on Appropriations (HRCA) as an instrument to identify quasi‐random variations in state‐level spending on highways. An exogenous pattern which emerges when a state gains an additional member to the HRCA is that it is allocated with new federal grants. This increase in federal transfers for infrastructure financing results in slashing of expenditures on highways and a crowding‐out effect of federal funding for state investments on highways. Spending cuts on highways produced by a new HRCA member being attained by a state can unwittingly cause income inequality to rise over a short 2‐year time horizon. Similar challenges with decentralized development to finance infrastructure via federal transfers to state and sub‐national governments may be encountered by other industrially advanced, emerging and low‐income developing economies. US data over the mentioned period reveal a strong positive correlation with state spending on highways and wages paid for construction jobs. Suggestive evidence indicates that the construction sector also plays an important role in the transmission channel from a rise in state spending on highways to lowering income inequality, albeit during specific intervals, as opposed to on a long‐term basis.

Consolidated Budgets of Russian Regions in the Context of the Crisis Provoked by the Global Pandemic

In the first half of 2020, with a marked reduction in tax revenues, there was an increase in the total amount of revenues of the consolidated budgets of the subjects of the RF, which in most cases did not compensate for the rate of inflation. The growth of the total amount of revenue was provided by the outstripping growth of all types of Federal transfers to the regional budgets. The situation in different regions of the country varied significantly, and the most serious losses were incurred by the most economically developed regions. Moscow bear the burden of a significant part of the total revenue loss. The growth of expenditures of the consolidated budgets of the Russian regions was significantly faster than the growth of their revenues. Health and social policy funding has increased most significantly, supported in part by Federal transfers. With the total deficit of the consolidated budgets of the Russian regions, about half of the regions had a positive budget balance (partly of a technical nature) at the end of the half-year. At the same time, the growth rate of public debt is not yet critical.

The Effects of Intergovernmental Grants in Ethiopia: International Lessons

Intergovernmental grants are an important feature of federal systems of governments in many countries. Grants from one level of government to another have been primarily used as a way of addressing the vertical fiscal imbalance that is often created in a federation. In the presence of disparate taxing capacity of regions, designing a good intergovernmental grant system that is acceptable by all regions is usually challenging. Yet the success of fiscal federalism greatly depends on how the federal government addresses the fiscal needs of regional governments through intergovernmental transfers. What lessons can relatively young federal countries like Ethiopia draw from the experiences of other countries? We examine various kinds of grants and their potential effects on the recipient regional government spending and economic growth. We also explore how federal transfers might affect the fiscal behaviour of regional governments and the welfare of the residents of recipient regions. We look at these important issues from both theoretical and practical perspectives focusing on the applicability of the international lessons to Ethiopia. Keywords: Grant, Intergovernmental, lesson, International DOI: 10.7176/PPAR/10-10-03 Publication date: October 31 st 2020

GOVERNMENT INCENTIVES OF AGRO-INDUSTRIAL REGIONS IN TIMES OF ECONOMIC RECESION

This article deals with theoretical and practical aspects of formulation and implementation of fiscal policy, income and expenses in particular. It also provides a brief analysis uncompensated receipts, regional budget expenditures on national economy, profit tax rise in revenue to regional budgets during the period of undeclared crisis in 2015 and the following period of economic recovery in 2016-2017. The position of the Altai Territory in the research group has been determined. The impact of federal and regional budgets on the dynamics of territories’ revenue trends from profit tax has been studied. Efficiency gains of budget management have been noted. Such indicators as the amount of profit tax revenue counting on per ruble of costs on national economy from a regional budget, the amount of the following year profit tax counting on per ruble of national economy costs from the previous year regional budget (in 2016-2017 in kopecks) were defined as criteria for evaluating the effectiveness. It has been shown, that taking into account the time lag of one year, budget investments into national economy, excluding direct federal transfers are insufficient in 9 out of 10 cases and their efficiency will grow only with the increase of these expenditures. The assertion about the importance of budget investments for economic development of the country and its regions has been confirmed, that underlines the necessity of greater use of public-private partnership system.

The Impact of Career Politicians: Evidence from US Governors

SUMMARYThis paper exploits the presence of Congressional experience in US governors that permits the identification of the relationship between political career experience and intergovernmental transfers. I assemble a novel dataset of governors’ political background and match this to federal transfer data from 1950 to 2008. Governors with Congressional experience have 0.8 percentage points more transfers to their state. I show evidence for one potential channel that this may act through, the federal grants system. The findings are robust to outliers in the data, selection effects, close elections and an alternative dependent variable based on a state’s share of total federal transfers

Análisis del presupuesto aprobado y del gasto ejercido, 2001-2017. El caso del Ramo 33

Algunas investigaciones han mostrado que el gobierno federal gasta más de lo establecido en el presupuesto de egresos. En el caso de las trasferencias federales, la evidencia aún es escasa. Por lo tanto, los objetivos de esta investigación son mostrar datos sobre la diferencia entre el presupuesto y el gasto ejercido del Ramo 33 en el periodo 2001-2017; destacar cómo se distribuye entre los estados; y determinar si la alineación partidista vertical incide en su repartición. Mediante un análisis de tipo panel, los resultados muestran que hay un sobreejercicio del gasto del Ramo 33, pero la alineación partidista vertical no tiene un efecto en él. En suma, no hay una influencia partidista en la distribución de estos recursos.

Regional Budgets: Results of 2019, Prospects for 2020

In 2019 the regional budgets revenues grew at a high rate, including due to the outpacing growth of Federal transfers under the condition of the economic recession. Corporate income tax, personal income tax and excise tax receipts provided the growth of own income, while property tax receipts decreased. The growth rate of regional budget expenditures was significantly faster than the growth rate of revenues. The priorities of the subjects of the Russian Federation were healthcare and the national economy. High growth rates of expenditures did not always lead to an increase in the volume of public debt – its total amount decreased by the end of the year. Only in some regions of the Russian Federation there was a significant increase in the amount of debt. Estimates of possible budget revenue losses that regions will inevitably face in the context of the impending economic crisis allow us to identify a group of Russian regions for which these problems will be most acute.

COVID-19, Fiscal Federalism and Provincial Debt: Have We Reached a Critical Juncture?

In 2019, Canada's gross subnational debt to GDP was well over 40 per cent, easily the highest in the world (see Figure 1). This level will only grow as the provinces grapple with the pandemic and its fiscal effects. Some believe surging provincial debts have brought Canadian federalism to a critical juncture: they have greatly increased the odds of federal measures to stabilize provincial finances. This article assesses this claim. The cleanest and most balanced path to fiscal sustainability is a combination of enhanced federal transfers, which would bolster provincial fiscal capacity, and national fiscal rules, which would constrain provincial borrowing. But the former is unlikely to restore sustainability on its own, and the latter would require a severe provincial debt crisis, which Canada's existing fiscal federal structures can avoid. COVID-19 has increased the odds of certain reforms, and it is difficult to predict their long-run effects. But any obvious paths to fiscal sustainability remain hidden.

Long-Run Impacts of Intergovernmental Transfers

This paper provides regression discontinuity evidence on the long-run impacts of a temporary increase in federal transfers to local governments in Brazil. Revenues and expenditures of the communities benefiting from extra transfers increased by about 20 percent during the 4 year period from 1982 to the end of 1985. Previously established schooling and literacy gains of school-age cohorts as well as reduced poverty in the community overall as of 1991 are generally attenuated but persist in 2000. By 2010 the estimated education and income gains are still positive but typically cannot be distinguished from zero. Children and adolescents of the next generation—born after the extra funding had disappeared—show gains of about 0.06 to 0.10 standard deviation across the entire score distribution of two nationwide exams at the end of the 2000s. Available evidence on mechanisms points to a persistent reduction of the student-teacher ratio in local public primary schools throughout the 1990s and 2000s. We also find discontinuities in education levels and incomes of test takers’ parents that are consistent with intergenerational human capital spillovers.

Governance of mental healthcare: Fragmented accountability.

Within international healthcare systems the neglect of mental health and challenge in shifting from institutional to community care have been recurrent themes. In analysing the challenges, we focus on the case study of Canada by exploring the manner in which health law and policy evolved to inhibit community-based mental healthcare, and compare the resulting funding landscape from an international perspective. The historical institutionalist analysis draws on the literature and healthcare finance data. As a spending statute, the Canada Health Act defines the terms on which the federal government finances publicly insured provincial healthcare. Despite the goal to support physical and mental well-being by removing financial barriers to access health services, exclusion of community care offered by non-physicians (such as psychotherapy) from the terms of the Act inhibited its fulfilment. Diminished federal transfers deepened the disincentive for provinces to establish community care: mental health declined from 11 to 7 percent of provincial healthcare spending from 1979 to 2014. Governance oversight was passed to provinces whose competing demands on diminished resources limited their capacity to extend care. Accountability was found fragmented as neither government stepped-in to ensure the continuum of care, even as federal transfers were restored and evidence of cost-effectiveness grew. Although American and Canadian funding patterns are similar, other OECD countries invest between 13 and 18 percent of healthcare expenditures on mental health. Lessons from the Canadian case are the manner in which its federal structure and intergovernmental dynamics shaped health policy, and the importance of ensuring representation from a range of perspectives in policy development. Federal financial incentives were also found to profoundly impact the expansion of community-based mental healthcare. Evidence shows that public insurance for community supports would reduce healthcare expenditures and employer productivity loss, resulting in savings of $255 billion over 30 years.

Fiscal powers of municipalities in Russia’s resource-rich regions and fixed capital investment

The article considers the nature and limits of the impact local fiscal decentralization exerts on private fixed capital investments in resource-rich Russia’s regions. The relevance of this topic is due, firstly, to the fact that sufficient expenditure and revenue powers at the local level ensure sustainable economic development, and secondly, the lack of research on relationship between investments and local fiscal decentralization in Russia. The study confirms the existence of an inverted U-shaped curve in the investment-decentralization association for the group of resource-rich regions as well as the superiority of revenue decentralization over expenditure decentralization in terms of its impact on economic development. For 2009—2016, investments were the highest when local fiscal decentralization was 46—47% and 43—51% in expenditure and revenue aspects, respectively (for Russia as a whole, 35—36% and 33—34%). Tax revenues in those figures do not exceed 30 p.p., the rest is occupied by earmarked grants (subsidies) and, especially, general-purpose grants (“dotatsii”). The excess of the optimal level of revenue decentralization over the expenditure one in resource-rich regions is explained by drivers of relatively large local powers there — less dependence on federal transfers, low regional tax burden, and greater elasticity of regional fiscal policy to external factors. The overall excess of optimal levels in comparison to Russia as a whole is explained by high local demand for both differentiation of expenditures and intraregional intergovernmental redistribution in those regions. Reduction of fiscal decentralization for 2008—2018 curbed private investment. The greatest losses were incurred by lack of revenue decentralization in the resource-rich regions, which could have reached more than 80% of the median investments.

The Economic Effects of Interregional Redistribution of Resources: the Case of Khabarovsk Territory

Interregional transfers are the tool for redistributing financial resources in national economy. Increase in transfers to the region affects the supply of freely provided public goods by residents. The study investigates the effects of changes in the volume of federal transfers on key variables of the regional economy using a two-regional computable general equilibrium model. A key feature of the used Groenewold-Hagger-Madden model is the behavior of regional governments, which optimize expenditures on public goods in such a way as to maximize the utility function of households within their jurisdiction. The latter are perfectly mobile between regions and consume private and public goods under budgetary constraints. The model is calibrated for a particular region, Khabarovsk Territory, and the rest of the nation. It is shown that a sharp increase in federal transfers to the regional budget leads to a significant inflow of labor resources to the region, but only to insignificant changes in the welfare, wages and per capita consumption of households. Regional government will change tax rates in such a way that a reduction in their spending will offset the increase in consumption of public goods through transfers. Several multipliers for key regional variables with respect to tax rate are calculated.