Fiscal Disparities Research Articles

Drivers of local government borrowing in China: Fiscal hunger and competition game under asymmetric decentralization

This paper contributes two mechanisms through which asymmetric fiscal decentralization drives local government borrowing: ‘fiscal hunger’ (borrowing to address budgetary fiscal gaps, leverage land resources, and pay off existing loans) and ‘competition game’ (borrowing to compete for bond issuance and state funds). Analyzing a dataset of 290 Chinese cities from 2006 to 2015, we find local government borrowing is driven by both fiscal hunger and inter-city competition. Borrowing is not confined to the growth-oriented purpose. Our Geographically Weighted Panel Regression uncovers the spatial patterns of two borrowing mechanisms, in which borrowing in less-developed regions is predominantly driven by fiscal hunger, while developed coastal regions actively engage in inter-city competition through borrowing. These dynamics may aggravate fiscal disparities among Chinese cities.

Vertical fiscal imbalances, environmental regulations and resource allocation — in the Chinese context

ABSTRACT Vertical fiscal imbalances (VFI) in China have created significant challenges for resource allocation and environmental governance. This study investigates the impact of VFI on resource allocation in Chinese cities. Results show that VFI intensifies resource misallocation, particularly at the provincial compared to the municipal level. And VFI influences resource allocation via informal and formal environmental regulations, with public and administrative regulations mitigating effects, while supervisory regulations exacerbate them. The negative impact of VFI is especially pronounced in declining cities, non-industrial hubs, and regions with severe resource misallocation. Additionally, VFI and resource misallocation demonstrate negative spatial spillover effects. Our findings provide valuable insights into the influence of VFI across different administrative levels in China, highlighting the need for policy reforms to address these fiscal disparities.

The Influence of Fiscal Decentralization of Economic Growth in Nias Islands

In general, the fiscal decentralization policy has succeeded in reducing fiscal disparities between levels of government and between regions, as well as encouraging improvements in public services and competitiveness in the regions. Increasing regional revenues from balancing funds, the authority to determine expenditure allocations and the superiority of the position of regional governments that are closer to the people are able to increase economic efficiency and allocate more priority spending according to community needs. However, the conditions of each region in Indonesia vary greatly, so that the impact of fiscal decentralization policies on regional economic growth also varies. On this occasion, research was conducted to analyze the effect of fiscal decentralization on the economic growth of the Nias Islands. Fiscal decentralization analysis uses income indicators, expenditure indicators and autonomy indicators and includes the population growth factor as a control variable. This study uses panel data from five districts/cities in the Nias Islands during the 2010-2021 period using the Fixed Effect Model method. Based on the results of panel data estimation in this study, the results show that fiscal decentralization has proven to have a significant effect on economic growth in the Nias Islands.

Srilankan Economic Crisis

Sri Lanka’s economy was already showing signs of weakness before the COVID-19 pandemic. Growth and poverty reduction had slowed down in the last five years. A restrictive trade regime, weak investment climate, episodes of loose monetary policy and an administered exchange rate had contributed to external imbalances. Sustained fiscal disparities, driven primarily by low revenue collections, combined with tax cuts in 2019, has contributed to high fiscal deficits, large gross financing needs, and a rapid growth in unsustainable debt . The Sri Lankan economic crisis is an ongoing crisis in the island country of Sri Lanka that started in 2019. It is the country's worst economic crisis since its independence in 1948. It has led to unprecedented levels of inflation, near-depletion of foreign exchange reserves, shortages of medical supplies, and an increase in prices of basic commodities

The Long and Winding Road to Local Fiscal Equity in the United States: A Fifty-Year Retrospective

Abstract Unlike many other countries, the United States does not have a comprehensive federal transfer scheme for explicit fiscal equalization but rather employs an array of categorical and block grants, some of which are formula-based while others are project-driven. However, the allocation of many of these grants has equalization effects resulting in the narrowing of fiscal disparities among jurisdictions. Few studies have attempted to quantify the extent of equalization achieved with federal and state grants in a manner that would allow comparisons across states and over time. In this study, we set out to measure the extent of equalization across local governments in the United States that is implicit in the federal grants system and more explicit in the grants implemented by the individual states. Rather than focusing on specific types of local services, we look at the evolution of per capita resources available to all types of local governments combined.

Impact of Intergovernmental Fiscal Transfer on Inter-Provincial Fiscal Disparity in Pakistan

The purpose of this research is to evaluate the disparity in the intergovernmental fiscal transfers to the sub-national governments, in the last four NFC awards specifically in the 7thNFC award in Pakistan. This study measures the disparity by employing two different approaches. Firstly coefficient of variation (C.V) approach i.e. variation in the regional own-source revenues to the variation in the total resource of regional government after inclusion of federal transfer and the own-source revenue, secondly, In addition, to estimate the impact of intergovernmental transfers on the fiscal disparity among the sub-national government this study uses panel data technique i.e. least square dummy variable (LSDV). The Results of fiscal disparity reflect that in Pakistan the disparity in combined regional own source revenue increases from 0.52 to 0.83 points during the last four NFC awards. However, at the sub-national level, the values of disparity remain constant at 0.16 in Sindh province which reflects fiscal efforts for the collection of own-source revenues among provinces. In contrast to this, the disparity increases in KPK, and its value reaches 0.240 in the existing award. The results of the empirical analysis also reveal that when the intergovernmental transfer increases by 1 percent the disparity ratio increases by 1.19percent. While the expenditure of the government increases the disparity at the sub-national level as the positive sign of the model reflects. Based on the findings this study suggests that Pakistan still needs to devise a revenue-sharing formula that encourages the efforts of optimal resource generation from the regional governments.

Assessing the 2019 Redesign of Bulgarian Fiscal Equalization System

In many countries the narrowing of horizontal fiscal imbalance at local government level is an important issue of national fiscal policy. Large fiscal disparities at municipal level could lead either to lower service levels in fiscally poor regions or to higher tax rates for similar service levels in these regions. In turn, this could thwart efforts to reduce inequality in income distribution between individuals or could induce fiscally inefficient migration of business and individuals. Since the launch of fiscal decentralization reforms in Bulgaria in 2003 part of central government grants system for municipalities has been the equalization grant aimed at financing a minimum level of local services delivery. The equalization formula has undergone many changes during the years, and the last one was implemented in 2019. The main focus of the current study is to compare the equalizing effect of the equalization schemes applied in Bulgaria in 2018 and 2019. In order to test whether the 2018 and 2019 distribution formulas carry an equalizing effect with respect to municipal expenditure needs, per capita transfers received is regressed on three variables or indicators reflecting the differences in the municipal expenditure needs. Our results show that the new equalization mechanism as of 2019 is better designed to capture the differences in municipal expenditure needs and to alleviate fiscal disparities at local level when compared to the mechanism applied in 2018.

Does revenue-sharing improve government service quality? Evidence from Seoul metropolitan districts

ABSTRACT As a way to narrow the fiscal disparity across local governments with different revenue capacity, revenue-sharing institutionalizes relatively affluent governments to transfer some revenues for the poor. However, effects of the shared revenue, for both transfer-losing and transfer-gaining governments, on individual governments’ service quality are unknown. In this study, we investigate the connection between the shared revenue and government service quality, the concept measured with tangibility, empathy, assurance, responsiveness, and reliability. Using data of 25 districts in Seoul Metropolitan Area from 2008 to 2016, our findings demonstrate the shared revenues are positively associated with all measures of government service quality.

Fiscal disparities among local governments in Zhejiang Province, China

ABSTRACT Although nearly all local governments in China face serious fiscal challenges, fiscal pressures on some local governments are more severe than on others. Using data from 2011 through 2016, this paper measures the relative fiscal condition of local governments in a single Chinese province as a means of quantifying fiscal disparities within the province. We measure the fiscal gaps between local governments’ expenditure needs and revenue-raising capacity. Expenditure needs are estimated using a regression-based strategy to identify a set of characteristics of each local government that influence the costs of delivering local public services. We measure own-source revenue-raising capacity as a function of both local GDP and actual local government revenues. Although fiscal disparities remain, they are substantially reduced after the receipt of equalizing intergovernmental transfers. Because per capita transfers to rural local governments are much larger than transfers to large city governments, post-transfer fiscal health is actually weaker in the province’s larger cities than in smaller, more rural jurisdictions.

Does fiscal decentralization promote economic growth? An empirical approach to the study of China and India

PurposeThe authors test the effect of expenditure decentralization and fiscal equalization on short- and long-run economic growth and estimate two-step generalized method of moment (GMM) simultaneous equations models, using panel data for China and India for the period 1985 to 2005. The authors estimate two simultaneous equations: a growth equation and equalization equation and find that expenditure decentralization has a negative and statistically significant effect at conventional levels on short-run economic growth for both China and India. However, the authors also find that this result is sensitive to the set of included explanatory variables. This leads the authors to conclude that expenditure decentralization has no effect on short-run economic growth for either country. The authors also find that expenditure decentralization has a positive and statistically significant effect on fiscal equalization for both countries but find no evidence that fiscal equalization affects short-run economic growth for either China or India. In contrast, the authors find that expenditure decentralization has a positive effect on long-run economic growth in the case of India, but not in the case of China. Finally, the authors report evidence that fiscal equalization has no effect on long-run economic growth in the case of China; however, the authors find that equalization has a positive and statistically significant at conventional levels effect on long-run economic growth in India.Design/methodology/approachThe authors estimate two-step GMM simultaneous equations models, using panel data for China and India for the period 1985 to 2005. To examine the effect of fiscal decentralization (FD) policies on economic growth in China and India, the authors estimate two equations: a growth equation and an equalization equation. For the growth equation, the authors adopt a production-function-based model that is widely used in the empirical literature on growth; however, the authors do make some compromises with this specification due to the unavailability of certain data. For the equalization equation, the authors include variables that economic theory and empirical evidence suggest influence fiscal disparities among subnational governments which in turn influence the demand for horizontal fiscal equalization (HFE). To the extent possible, the authors employ the same econometric specification, variable constructions and sample periods for both China and India. The authors believe this strategy provides a more rigorous test of the FD hypothesis.FindingsThe authors find that expenditure decentralization has a negative and statistically significant effect at conventional levels on short-run economic growth for both China and India. However, the authors also find that this result is sensitive to the set of included explanatory variables. This leads to conclude that expenditure decentralization has no effect on short-run economic growth for either country. The authors also find that expenditure decentralization has a positive and statistically significant effect on fiscal equalization for both countries but find no evidence that fiscal equalization affects short-run economic growth for either China or India. In contrast, the authors find that expenditure decentralization has a positive effect on long-run economic growth in the case of India, but not in the case of China. Finally, the authors report evidence that fiscal equalization has no effect on long-run economic growth in the case of China; however, the authors find that equalization has a positive and statistically significant at conventional levels effect on long-run economic growth in India.Research limitations/implicationsDue to the importance of FD policies, especially to many developing countries that are currently pursuing decentralization reforms, future research should examine the effect of FD on economic growth for other countries. Furthermore, although it would be difficult to do so, future research should examine whether FD promotes political stability on ethnically diverse countries.Originality/valueTo the best of the authors’ knowledge, no one has examined the effect of FD policies on India's growth experience. What is more is that this is also the first of its kind to have a comprehensive empirical investigation into these two major developing countries with very interesting similarities and differences in FD policies. It is thus of great importance to examine the effect of expenditure decentralization and HFE on economic growth in China and India.

Fiscal disparities in Indonesia in the decentralization era: Does general allocation fund equalize fiscal revenues?

AbstractThis study analyses the level and trend of fiscal disparity among Indonesian districts. It also explores the determinants of fiscal disparity using two inequality decomposition methods: decomposition of the Gini coefficient and the coefficient of variation by revenue sources and decomposition of the Theil index by regions. Disparity in shared revenue has been large due to the very uneven spatial distributions of natural resources and tax bases. It is unambiguously an inequality‐increasing fiscal transfer in Indonesia. A general allocation grant has served to equalize fiscal revenue, but overall fiscal disparity is still high. To reduce the disparity, it may be necessary to modify the general allocation formula since it appears to be defective. This study proposes a new allocation formula. Though the reduction in fiscal disparity is not substantial in the short run, the new formula would provide an incentive for resource‐poorer district governments to raise their own source revenue. This could create a virtuous cycle if the additional own source revenue is used for local development, particularly education and infrastructure. Another option to reduce fiscal disparity would be the further expansion of special allocation grant. If the government allocates the special allocation fund effectively across districts in Indonesia, it could make a special allocation grant an inequality‐decreasing fiscal transfer.

지방소비세의 인상이 지방정부 간 재정력 격차에 미치는 영향에 관한 연구

본 연구는 지방소비세의 10%p 확대가 지방자치단체 간 재정력 격차에 미치는 영향에 대 해 분석한다. 2017년 결산자료를 기준으로 지방소비세 10%p의 인상 시 지방자치단체 간의 재정력 격차의 변화를 분석해 본 결과 광역자치단체 간에는 재정력 격차가 미세하게 완화 되지만, 기초자치단체 간의 재정력 격차는 서울, 부산, 대구, 울산 등 일부 광역시의 자치 구에서 완화된 외에는 전체적으로 심화 될 것이라는 결과를 얻었다. 이런 연구결과는 지방 소비세 10%p 인상은 중앙정부에 대한 지방정부의 재정분권에는 긍정적 영향을 주지만 지 역 간 재정 격차의 완화에는 미세하지만 부정적 영향을 줄 것을 의미한다. 달리 해석하면 지방소비세인상 시 배분지표의 가중치 적용, 지역상생발전기금 운영 등의 지역 간 형평화 를 위한 장치를 갖추지 않으면 지방소비세 인상이 지방세수를 증가시키지만 지역 간 재정 격차는 벌어지게 할 것이라는 사실이다. 문재인 정부의 재정분권 정책이 세입분권의 확대와 지역균형발전이란 두 가지 목표를 지향하고 있고 지방소비세 확대가 실제로 시행되고 있는 주된 정책인 이상 지역 간 형평화 를 위한 장치를 확대할 필요가 있다. 이를 위해서는 지방소비세의 배분 시 1인당 지표의 개발과 더불어 전국 평균치를 중심으로 상위그룹과 하위그룹의 편차허용 범위를 정하고 상위자치단체로부터 하위자치단체로 재원을 배분하는 수평적 재정조정제도를 법률로 규정 하는 것을 고려할 필요가 있다.

Fiscal disparities in Uruguay’s regions: The role of a new systemof intergovernmental equalization transfers

This article conducts an empirical analysis of the role of intergovernmental transfers in a group of regions (departments) in Uruguay during the period 2006–2014. It examines the structure and evolution of regional fiscal disparities and the equalizing effects of the current transfer system. It then proposes an innovative methodology for simulating the effects of a new system of equalization transfers. The main finding is that implementing this new system would help to consolidate greater territorial fiscal homogeneity in Uruguay.

A computerized study of factors of economic growth disparity in Indonesia

Disparity of economic development between regions is one of the problems and major challenges of economic development in Indonesia in the current situation and in the future. The success of development in the fiscal decentralization system cannot be measured only by the economic aspect with growth indicators or GRDP values of one region, however, it must be extended to indicators of economic progress, especially those concerning general basic services. Government put some efforts to reduce fiscal disparity, one of them is by providing the equalization funds, which are; SAF (Special Allocation Funds), GAF (General Allocation Funds) and RSF (Revenue Sharing Funds). However, in fact, the provision of equalization funds still causes fiscal imbalances. The purpose of this study is to describe variables that affect the condition of economic disparity in Indonesia, then examine the factors that cause economic growth disparity in Indonesia and the policies that should be carried out by the government to solve the problems. This study found that some researchers use different variables/indicators in determining economic growth in Indonesia.

The territorial fiscal gap in Colombia

This paper presents an estimation of expenditure needs and fiscal capacity of Colombia's municipalities and departments in 2014. We use standard per capita norms to estimate the spending needs and data envelopment analysis for the local fiscal capacity. The results show that: (i) there are high horizontal fiscal disparities in Colombia, with greater incidence in municipalities than in departments; (ii) these disparities favour more developed territories; and (iii) there is evidence of a centre‐periphery pattern in the horizontal fiscal disparities, causing central regions of the country to have a lower imbalance between expenditure needs and fiscal capacity.

Фінансове вирівнювання в умовах реформування системи управління державними фінансами

In connection with the expiration, in 2020, of basic regulatory and legal acts coordinating the implementation of the decentralization, it is needed to actualize and determine further directions of reform of the public finance management system. The purpose of the article is to determine efficient methods and directions of further improvement of the financial equalization system in Ukraine in order to form progressive local budget resource model, which by more balanced socio-economic development of municipalities will meet the needs of the population. The article addresses the essence and main components of financial equalization as a tool of budget regulation. The contents of the fiscal imbalance, horizontal and vertical equalization, evolution of methods of removal of fiscal disparities are highlighted. A European approach to overcoming the effects of the unequal distribution of potential sources of the financing of expenditures of bodies of local self-government is characterized. Features and invariance of reform of the public finance management system on the basis of decentralization, renewal of the financial equalization mechanism are considered. As a result of research, the effects (achievements and shortcomings) of the functioning of tools of vertical and horizontal equalization in the budget system of Ukraine implemented as a result of reform of fiscal decentralization, are analyzed. Basic recommendations aimed at further strengthening and establishing a stable local budgets base being a foundation for the whole budget system and a financial basis for local self-government, are proposed, on the strategy of improving the financial equalization mechanism that will provide achieving a balance of the interests of all participants in inter-budgetary relations.

An Analysis of Equalizing Capacity of State Transfers for Local Government Activities in Bulgaria

The aim of this paper is to examine the fiscal disparities among local governments in Bulgaria and to show the capabilities of the existing intergovernmental transfer system to reduce them. Fiscal equalization policy in Bulgaria is performed through a general equalization transfer for local activities the distribution of which is based on local government tax revenue, as well as on service delivery costs. We measured the extent of equalization in three years – 2007, 2011 and 2017, during which the equalization transfer formula underwent considerable changes. For 365 municipalities we found out that, although the applied equalization mechanisms reduced the inequality in municipal own-source revenuе the remaining fiscal disparities among local governments were still considerable. Our research also suggests that disparity-reducing strength of the general equalization transfer remained almost unchanged during the period under review with its equalizing potential hampered to a great extent by the inclusion of additional compensatory elements in the distribution formula.

Fiscal disparity, institutions and asymmetric yardstick competition

This letter introduces a disparity in the costs of rent appropriation in a yardstick competition model and shows that the yardstick bias caused by fiscal disparity might be mitigated. In particular, the incumbent of the fiscally rich jurisdiction can no longer fully exploit his or her fiscal advantage.

Unequal States, Unequal People: Fiscal Inequity and the Values of Federalism

The fields of regulatory federalism and fiscal federalism have developed largely in isolation from each other. Building on the new scholarship of federalism in the legal academy, this Article seeks to integrate the insights of the two areas. The financial dimension offers a crucial perspective for the problems of governmental organization at the heart of regulatory federalism. One of the most important elements of fiscal federalism, generally unappreciated in legal scholarship, is the vast disparity in the financial resources of the states. The United States stands alone among industrial federal systems in not seeking to equalize resources among the states. This fiscal inequity means that in fundamental ways states are not equal. Using the examples of education and health care, the Article demonstrates the significance of this inequality and how it threatens the protection of human rights and other values associated with federalism. The Article argues for a new approach to federalism that seeks to mitigate these inequalities, while continuing to benefit from the advantages of decentralization. The fiscal disparity among states demands attention, not because states have inherent dignity, but because the inequality of states diminishes the dignity of their people.

시･군 조정교부금제도의 개정이 재정형평성에 미치는 영향 : 경기도 31개 시·군을 대상으로

시･군 조정교부금제도의 개정이 재정형평성에 미치는 영향 : 경기도 31개 시·군을 대상으로