Intergovernmental Fiscal Relations Research Articles

Regulating local government debt in China: Intended and unintended consequences

This study integrates institutional and empirical analyses to investigate the intricate policies that regulate local government debt in China. It finds that, within a remarkably short period, China has skilfully incorporated local government debt into the local budget management system, thereby transforming it from a mere transaction between local governments and credit agencies to an intergovernmental fiscal relations framework. The study also establishes that the pivotal debt-regulating policies are more geared towards prioritizing the cost of debt over its scale. Official documents, statistical data, and in-depth interviews provide evidence to support these findings. Drawing on an analysis of county-level panel data in Sichuan Province, this study identifies two main effects of these policies. Primarily, the cost of local general debt may trigger the notorious soft budget constraint, thereby incentivizing county-level governments to depend more heavily on superior transfer payments. Additionally, the fiscal consolidation policy, which focuses on the cost of local special debt, may lower the debt ratio. However, it also has the unintended consequence of bolstering the local government’s reliance on land finance.

INTERBUDGETARY RELATIONS IN THE SYSTEM OF BUDGET REGULATION

Introduction. The article is devoted to the study of the essence of interbudgetary relations in the system of budgetary regulation, key aspects of their regulation, instruments of interbudgetary relations and their application in Ukraine under martial law.
 The purpose of the article. The purpose and objective of the article is to study the essence and relevance of the problem of formation of interbudgetary relations under martial law.
 Results. The author analyzes the approaches and defines various aspects of the essence of intergovernmental fiscal relations based on the literature. The characteristics of different approaches to the interpretation of the essence of the concept of ‘intergovernmental fiscal relations’ are presented.
 The mechanism of horizontal equalization of the tax capacity of the territory is outlined according to the Budget Code of Ukraine. The mechanism of transferring intergovernmental transfers from the state budget to local budgets and intergovernmental transfers between local budgets is determined.
 The author considers the types of subsidies and subventions provided from the State budget to local budgets. Their amounts are analyzed.
 It is proved that the system of horizontal financial equalization redistributes financial resources in favor of those local authorities which have an imbalance and provides partial compensation for the losses of local budgets of territorial communities from the lack of personal income tax.
 Conclusions. It is concluded that the financial basis for the development of any state is budgetary funds. Interbudgetary relations are the main instrument for ensuring the proper functioning of the national budget system.

FACTORS DETRIMENTAL TO MANAGEMENT OF DEVOLVED FUNDS IN KENYA. A CASE OF NAIROBI COUNTY

Decentralization is meant to improve public services, but relatively few studies examine this question empirically. Poverty, inequality and social exclusion are deeply-rooted structural and historical phenomena in Kenya. Successive Kenyan governments have attempted fiscal decentralization as a way of ensuring the country achieves equitable development across the many regions. Fiscal decentralization consists primarily of devolving revenue sources and expenditure functions to lower tiers of government. By bringing the government closer to the people, fiscal decentralization is expected to boost public sector efficiency, as well as accountability and transparency in service delivery and policy-making. Decentralization also entails greater complexity in intergovernmental fiscal relations. Coordination failures in fiscal relations are likely to have a bearing on the fiscal positions, nationally and sub nationally. The purpose of this project was to find the factors that are detrimental to the management of the devolved funds in two levels of government. Increased local financing after fiscal decentralization has opposite two effects, that is, (1) the local finance derives incentive for effective management, and (2) it may induce the lack of public resource for managing public expenditure, which is particularly needed in the basics of managing the lower levels of government. This project analyzed the detrimental factors that affect management of fiscal funds by a county government. The objectives used by this study were; To establish the effects of corruption in the management of devolved funds in Nairobi City County, to determine the effect of accountability in the management of devolved funds in Nairobi City County, to determine the effect of financial regulations in the management of devolved funds in Nairobi City County and to establish the effects of adoption of IFMIS in the management of county funds in Nairobi City County. The study adopted a descriptive research design. From the findings, Accountability, Adoption of IFMIS, and Financial Regulations were found to have positive and significant effect on Financial Management while the effect of corruption was found to have a negative relationship with financial management. From the findings and conclusions therefore, this study recommended that Nairobi County Government consider Accountability, Adoption of IFMIS, and Financial Regulations as the key factors that could determine the management of devolved funds.

Interbudgetary relations in ukraine: essence and features of implementation in modern conditions

Problem setting. The issues of implementation of interbudgetary relations in the form of interbudgetary transfers, development of high-quality, simple and transparent mechanisms for their provision between different parts of the state budget system are conceptual both in normal conditions of budgetary and legal regulation, and even more so in extraordinary circumstances. It is quite clear that martial law belongs to such circumstances, and the introduction of such a state by the Decree of the President of Ukraine «On the Introduction of Martial Law in Ukraine» of February 24, 2022, No. 64/2022 directly affected changes in budget legislation, including interbudgetary relations. analyses of recent researches and publications. Intergovernmental fiscal relations, their essence, forms and peculiarities of implementation have been the subject of research by such economists and lawyers as: M. P. Agafoshyna, A. E. Buriachenko, A. S. Hlusenko, O. O. Dmytryk, Z. I. Peroshchuk, K. O. Tokarieva ect.. At the same time, in recent years, the issues of legal regulation of interbudgetary relations have not been the subject of thorough scientific research. On February 24, 2022, martial law was introduced in Ukraine due to Russia’s armed aggression. These circumstances have had a significant impact on budgetary regulation and the course of interbudgetary relations as well. Purpose of the research is to characterize the legislative changes in the implementation of interbudgetary relations under martial law in Ukraine. article’s main body. The article analyzes the legislative changes in the implementation of intergovernmental fiscal relations under martial law in Ukraine. It is emphasized that such changes are diverse. In particular, a number of transfers to local budgets have been reduced with a view to directing them to the reserve fund of the State budget to ensure financing of territorial defense measures, protection of public safety and functioning of the public sector and public utilities during martial law. It is emphasized that under martial law, the transfer of funds between local budgets is possible without concluding a relevant agreement. Given the above, we conclude that the legislator in this situation expands the discretion of authorized persons as to whether to conclude an agreement on the transfer of intergovernmental transfers or not. On the one hand, such an approach can be considered reasonable, since under martial law it is important to make quick, unbureaucratized decisions to perform certain tasks and finance expenditures at the local level. On the other hand, the question arises as to the legal basis for the transfer of funds between local budgets in the form of appropriate intergovernmental transfers. conclusions and prospects for the development. The author emphasizes that during the period of martial law in Ukraine, the legal mechanisms of such subventions as: (1) subventions from the state budget to local budgets for the purchase and construction of housing for the purpose of transferring internally displaced persons for temporary residence; (2) subventions from the state budget to local budgets to meet the urgent needs of the state functioning under martial law were regulated. In addition, amendments were made to the Procedure and Conditions for Granting Subventions from the State Budget to Local Budgets for the Implementation of Projects under the Program for the Restoration of Ukraine. The legal mechanisms of such subventions are analyzed.

الاعتبارات الاقتصادية والدستورية في تخصيص مسؤوليات الإنفاق في الدول الفدرالية

This study discusses the assignment of spending responsibilities in federal countries, taking into account both economic and constitutional considerations. According to the theory of fiscal federalism, the economic functions of governments contain resource allocation, stabilization, and redistribution. However, it is also important to consider constitutional considerations, as federal systems are based on constitutions and the distribution of power between government levels is influenced by political and historical variables. While economic considerations are vital for achieving efficiency and equity, constitutional considerations are crucial for determining functions and responsibilities and safeguarding the distribution of power consistent with federalism principles. Therefore, this study begins by questioning the best allocation of spending responsibilities in light of economic and constitutional considerations, and what methods can be used to solve conflicts that arise in government financial relationships. We assume that economic considerations alone are not enough to design the financial system, especially in federal countries. While they theoretically explain what needs to be done to achieve economic equity and efficiency, constitutional considerations explain the types of constitutions in terms of details of power distribution in general, including financial matters and functional responsibilities for both central and regional governments. We concluded that there is no one-size-fits-all approach for all federal countries to distribute powers, as federal states operate in different political and historical settings, and the nature of intergovernmental fiscal relations are constantly changing.

الاعتبارات الاقتصادية والدستورية في تخصيص مسؤوليات الإنفاق في الدول الفدرالية

This study discusses the assignment of spending responsibilities in federal countries, taking into account both economic and constitutional considerations. According to the theory of fiscal federalism, the economic functions of governments contain resource allocation, stabilization, and redistribution. However, it is also important to consider constitutional considerations, as federal systems are based on constitutions and the distribution of power between government levels is influenced by political and historical variables. While economic considerations are vital for achieving efficiency and equity, constitutional considerations are crucial for determining functions and responsibilities and safeguarding the distribution of power consistent with federalism principles. Therefore, this study begins by questioning the best allocation of spending responsibilities in light of economic and constitutional considerations, and what methods can be used to solve conflicts that arise in government financial relationships. We assume that economic considerations alone are not enough to design the financial system, especially in federal countries. While they theoretically explain what needs to be done to achieve economic equity and efficiency, constitutional considerations explain the types of constitutions in terms of details of power distribution in general, including financial matters and functional responsibilities for both central and regional governments. We concluded that there is no one-size-fits-all approach for all federal countries to distribute powers, as federal states operate in different political and historical settings, and the nature of intergovernmental fiscal relations are constantly changing.

Modeling China's Intergovernmental Fiscal Relations in the Initial Period of Economic Reforms

Modeling China's Intergovernmental Fiscal Relations in the Initial Period of Economic Reforms

Fiscal Decentralization and Intergovernmental Fiscal Relations in Sub-Saharan Africa: A Critical Literature Survey and Perspectives for Future Research in Cameroon

Much literature exists on fiscal decentralization and intergovernmental fiscal relations in sub-Saharan Africa, and some of the very salient policy actions that have impacted local government development have emerged from such literature. The developing world, including sub-Saharan Africa (SSA), has markedly promoted fiscal decentralization in the last three decades. However, many important aspects of fiscal decentralization in SSA and Cameroon, in particular, have not been addressed by existing literature. The main objective of this review paper is, therefore, to identify the literature gaps and design an agenda for future research in the areas of fiscal decentralization and intergovernmental fiscal relations that has the potential to impact policy and spur development in Cameroon. A qualitative research methodology (content analysis) is used to gather, group, and offer a critical look at existing literature on the benefits of fiscal decentralization and intergovernmental fiscal relations in sub-Saharan Africa. It uses an integrative review and a standardized approach of abstracting appropriate information from each article and performing an appropriate analysis of the literature survey of a few decentralized countries in SSA as the population focused on in the primary studies. This review paper recommends that areas for further research on FD in Cameroon should include: Types of funding autonomy desired by local government councils in Cameroon; Revenue sharing formulas that are good for Cameroon’s economic development; How central government transfers enhance local revenue mobilization in councils which share the same political affiliation as the ruling party compared to those who do not. Studies that point to new ways of generating supplementary financing at the local level in Cameroon to match the increased responsibilities due to decentralization are still rare. The percentage of shares of central government revenue transfers to local communities is necessary to reduce poverty and inequality, and what agency and criteria should be put in place to control the execution of these transfers? The above recommendations of this review paper will greatly inform theory, policy, and practice on fiscal decentralization realities in SSA as a whole and Cameroon in particular.

DECENTRALIZATION IN UGANDA: DECONSTRUCTION OF THE INTERGOVERNMENTAL FISCAL RELATION MODEL

Most countries that have adopted fiscal decentralization to improve governance and public sector performance have found that improving service delivery is the most appealing goal. However, the focus on quick service delivery results has led to a tendency to overshadow the design of operational and institutional frameworks that deliver the goals. As a result, most countries' fiscal decentralization policies have been in place for a long period yet have yielded only marginal effects. This article discusses a study that looked at how inter-governmental fiscal ties, as a design feature of fiscal decentralization, influenced the implementation and effects of fiscal reforms in Uganda. This article deconstructs Uganda's intergovernmental fiscal relations model by bringing together some of the key elements of intergovernmental fiscal relations that are critical to the design and implementation of fiscal decentralization projects in Uganda. The discussion in this article explains the theory that underpins intergovernmental relations and the difficulties of relational concerns in Uganda's conceptualization and implementation of fiscal decentralization. It also defines the various concepts of intergovernmental fiscal relations and considers the consistency of the key characteristics of fiscal decentralization theory and practice. The article concludes with a reflection on the design and operational features essential to enable intergovernmental fiscal relations that positively influence service delivery.

Structure of local government budgets and local fiscal autonomy: Evidence from Indonesia

This study aimed to investigate the critical aspects of Indonesia’s local government budget structure. The impact of the budget on local fiscal autonomy was also examined by separating the sample of provinces in Java Island and Bali versus Non-Java Island and Bali. The unbalanced panel data was collected on 34 Indonesian provinces from 2013 to 2020. The results showed that locally-generated revenue and general allocation funds positively affect the regional fiscal autonomy index. These results indicate that local revenue and general allocation funds have improved regional fiscal autonomy. When the provincial sample is separated, general allocation funds positively and significantly affect the regional fiscal autonomy index in the provinces of Java Island and Bali. Furthermore, locally-generated revenue, as well as general allocation and profit-sharing funds, play a significant role in increasing the regional fiscal autonomy index in provinces outside Java and Bali, such as Sumatra, Kalimantan, Sulawesi, and Papua. These findings suggest that different geographical conditions and infrastructure have varying effects on encouraging regional fiscal autonomy. This study invites policymakers to address the strengthening of regional authority to explore income sources and budgeting quality and evaluate intergovernmental fiscal relationships. AcknowledgmentThe authors express gratitude to the three anonymous reviewers and seminar attendees at Mulawarman University for their insightful comments.

Emerging Issues and Challenges to Fiscal Federalism in Pakistan

After the enactment of the 1973 constitution, the defined roles of federal and provincial governments hit snags when democracy got derailed by two martial laws between 1977 and 2008. The consequences were obvious, as the federation; inter-provincial harmony, and intergovernmental fiscal relations witnessed wide socio-economic development gaps in Human Development Index amongst provinces. The genuine pressing public demand was reflected through a consensus of 7th NFC award during the 18th constitutional amendment by then the democratic government to create harmony in society in general, raising the responsibilities, in particular. The analysis examined the issues like enforcement of fiscal discipline, strengthening the role of the Senate of Pakistan, local governments, barriers to internal trade, absence of fiscal responsibility laws, devolution of further taxes such as GST on retail sales and wholesales needs to be corrected to mitigate dividends of 7th NFC award making fiscal federalism principles a great success in Pakistan.

Fiscal Federalism and Challenges of National Development in Nigeria

Abstract In emerging and developmental state of Nigeria, the construct of federalism has continued to attract gamut of attentions due to its configuration and cosmetic nature. The Nigerian state since amalgamation of the 1914 and subsequent constitutional development that ushered in federalism, revenue allocations and transfers of resource control had become contending issues and debates that had propelled lingering questions on Nigerian federal practices. The witness is the persistent struggle for redrafting of revenue allocation parameters and quest for restructuring. The most worrisome is the power of government at the centre determining what constitutes revenue allocations and how it would be shared among the federating units. However, it is against this backdrop that the study appreciates the intergovernmental fiscal relations, institutions and measures aimed at controlling excesses and imbalances amongst the tiers of government in Nigeria. Methodologically, the study utilized documentary method and data were generated through the secondary sources and analyzed in content. The framework of analysis for the study was anchored on the power theory. The findings of the study had adequately revealed that components and federating units are engulfed with myriads of developmental challenges due to the nature and character of the fiscal and federal deficits. Therefore, the paper recommends the need for defined statutory role of each and culture of self reliant among the tiers of government.

Perspective Directions of Improvement of Management of Intergovernmental Fiscal Relations in Ukraine on the Example of the Developed Countries of the World

Abstract. Introduction. In any state, due to the existence of an administrative-territorial division, there are relations between public authorities of different levels in the budgetary sphere. The main task of organizing and managing inter-budgetary relations is to provide state guarantees at a certain minimum acceptable level throughout the territory and all citizens regardless of their place of residence when receiving equal state social services. At present, unfortunately, in Ukraine there is a political inconsistency in the problem of the division of competences and responsibility for the implementation of specific functions of central, regional and local authorities, which negatively affects the processes of redistribution of intergovernmental resources. Purpose. The purpose of this article is to investigate the mechanisms of implementation of the state budget policy and the model of organization of public administration of budget relations, which are used in economically developed countries of the world in order to determine their specificity, which will enable to effectively regulate the current economic situation in Ukraine. Results. The current mechanism of budgetary equalization and the model of organization of public administration of budget relations in Ukraine is analyzed. The models of state participation in budget policy of different countries of the world are outlined. The components of the mechanism of management and regulation of interbudgetary relations at the regional level are determined. Conclusions. Considering the model of the mechanism of management of intergovernmental relations, we can conclude that there is no definite model acceptable to all countries of the world. The construction of a specific mechanism is based on the level of decentralization of the budget and taxation system, the scope of the powers of local authorities, the political choice between efficiency and equality, the depth and degree of disproportion between administrative and territorial units.

Composite fiscal decentralisation and green innovation: Imperative strategy for institutional reforms and sustainable development in OECD countries

AbstractImproving environmental quality and fiscal management has become one of the utmost imperative policy agendas for sustainable development. Although many studies explore multiple deriving factors of environmental sustainability; however, very little is known regarding the impact of composite (revenue and expenditure) fiscal decentralisation (FD) on environmental quality. Manifestly, the intergovernmental fiscal relations advocate to ensure the alignment of tax and spending powers to promote sustainable and inclusive growth. Therefore, we explore the asymmetric linkages between composite FD, green innovation, institutional governance and carbon emissions in 32 OECD countries. Our preliminary results confirm non‐linearity and structural changes in data, which instigate us to apply the asymmetric method of moments quantile regression. The overall findings exhibit that composite FD significantly mitigates carbon emissions only at medium to higher (5th–9th) emissions quantiles. In contrast, green innovation reduces carbon emissions from lower to medium (1st–5th) emissions quantiles. Institutional reforms promote environmental sustainability across all emissions quantiles (1st–9th). Interestingly, the emissions‐reducing effect of composite FD, green innovation and institutional governance is highest for higher emissions quantiles and lowest for lower emissions quantiles. These results provide valuable policy recommendations for all stakeholders.

The impact of institutions on regional credit ratings in Russia

Relevance. Institutions of a fiscal system play a significant role in regional credit ratings. This is reflected in the low creditworthiness of Russian regions from the international perspective. Research objective. The paper discusses the role of the institutional factors in the credit ratings assigned to Russian regions by Russian and international agencies. Data and Methods. The study analyzes the rating methodology adopted by Russian and international credit rating agencies and tests the presence of the institutional factors by conducting a formal regression analysis based on the data from the budgetary systems of Russia and the United States. Results. We demonstrate that international agencies value institutional factors, while Russian agencies use formal quantitative indicators. By applying comparative regression analysis to the economic and fiscal indicators of Russian regions and U.S. states, we found that The Big Three (Fitch Ratings, S&P Global Ratings and Moody's Investors Service) rate Russian regions lower than U.S. states, although the formal indicators between the two fiscal systems at the regional level do not differ as much. Conclusions. We conclude that the lower creditworthiness of Russian regions in the international perspective reflects the weakness of the institutions in the Russian budgetary system. Practically, the assessment of regional creditworthiness in Russia by the international agencies highlights the areas of intergovernmental fiscal relations that need improvement, most notably the insufficient tax and spending autonomy of local and regional governments.

Fiscal Decentralization and Economic Growth. The Case of Mogadishu, Somalia

With the failure of the centralized military regime and the subsequent transitional governments, Somalia adopted decentralized federal governance following the approval of a provisional federal constitution by 825 constituent assemblies representing different clans. However, the Fiscal decentralization in Somalia is in its infancy stage, and the allocation of functional assignments among the federal and state governments is yet to materialize. Therefore, the primary objective of the present study is to examine the effect of fiscal decentralization on economic growth in Mogadishu, Somalia, emphasizing the current practice and challenges. The study employed descriptive case study research that collected qualitative and quantitative primary data through an online mixed questionnaire and structured interview guide with the target population and analysed with due process. The study findings reveal that adequate revenue and expenditure responsibilities with some degree of fiscal autonomy to subnational governments are critical to properly implementing fiscal decentralization and improving citizens’ living standards. In addition, the research found that political stalemate, weak national government, poor cooperation among different levels of government, security-related challenges, limited technical, administrative or fiscal capacities, and economic disparity are among the obstacles that hinder effective fiscal decentralization in Somalia. Finally, the study recommends strengthening intergovernmental fiscal relations, finalizing the provisional constitution review to address financial matters, developing a revenue-sharing formula that guides fiscal transfer arrangements, enhancing the institutional capacity of subnational governments, and allocating the considered budget to the social and economic services as they are necessary economic growth.

Regional disparities and fiscal federalism in Russia

This paper examines how regional disparities have evolved in Russia and how Russia’s system of intergovernmental fiscal relations is managing these disparities. Regional disparities have fallen over the past two decades but remain relatively high. Socioeconomic outcomes remain worse in lagging regions despite faster growth and convergence in income levels. The twin shocks of COVID-19 and lower oil prices appear to have impacted richer regions disproportionately. Compared to other large countries with federal systems of government, Russia stands out with its high reliance on direct taxes as a revenue source for its regions. Russian policymakers have made efforts to reduce regional disparities by designing a federal transfer system that intends to close vertical imbalances, achieve redistribution, and insure regions against both common shocks (“stabilization”) and idiosyncratic ones (“risk-sharing”). Transfers from the federal budget to the regions provide some redistribution by reducing the dispersion in real per capita fiscal spending, but also tend to be associated with lower growth. The Russian fiscal system offers degrees of redistribution and risk sharing of around 26 and 18%, respectively — with in-kind social transfers contributing the most. Finally, federal transfers in the aggregate tend to be procyclical and are also fairly unresponsive to shocks to regions’ own revenues.

Does VAT retention rate affect firms’ capacity utilization? Evidence from China

Value-added tax (VAT) is shared between central and local governments, and is levied based on firms' production location, which provides incentives for local governments to intervene in firms' production. This paper investigates how local governments' VAT retention rate affect firms' capacity utilization theoretically and empirically. We find that the more VAT retained by local governments', the lower the firm's capacity utilization. Our findings suggest the fiscal and taxation system reform should correct local governments' improper incentives and eliminate the negative effects of the distorted intergovernmental fiscal relationships on firms.

How does ethnic diversity shape the design of intergovernmental fiscal relations? Evidence from China

AbstractThis study examines how ethnic diversity shapes the design of intergovernmental fiscal relations in regimes such as China, where local accountability and resident mobility are largely absent. We argue that in these regimes, ethnic diversity largely captures potential social conflicts and instability, consequently requiring a higher level of fiscal centralization and regional equalization from upper‐level governments to preserve social stability. Using provincial and sub‐provincial level panel data from China for 1995–2019, we find strong supporting evidence that an increase in a province's ethnic diversity significantly increases fiscal centralization and the provincial government's fiscal equalization efforts. We also show that these effects tend to be stronger in provinces whose leaders have closer ties with the central authority and where local capture is less serious. Our study contributes to a better understanding of ethnic diversity's consequences on the policy choices governments make.

2 - Politics Does Matter: The Nigerian State and Oil (Resource) Curse

Conventional explanations of the resource curse, or the paradox of abundance, correlate resource abundance and bad economic policies, underdevelopment, poverty and conflict. Such a conclusion has become debatable and has encour- aged analysts to develop conditional explanations that emphasize the role of the political rather than economic factors in the mechanisms underpinning the re- source curse. Using the Inter-governmental Fiscal Relations system in Nigeria as an example, this paper argues that, while the policy choices of politicians determines how resource rents are utilized, the extent to which political institutions promote the use of rational and meritocratic criteria in allocating public sector resources and ensure accountability is what matters. This is of crucial impor- tance in determining whether resource abundance will lead to resource curse.