Intergovernmental Fiscal Transfers Research Articles

Dwindling funds and increased responsibilities: Decentralization, unfunded mandates, and Harare's infrastructure crisis

Zimbabwe's capital city, Harare, faces severe infrastructural challenges. The city is presented with major constraints in its ability to adequately provide services for its growing population while losing essential streams of revenue required for infrastructural maintenance and development. This occurs in the context of the decentralization from the Zimbabwean national government to its cities. Cities like Harare are tasked with mandates to govern but are not provided the adequate financial means nor support to sustain their population or aging infrastructure. In this paper, we study this issue by conducting a broad literature review on decentralization and unfunded urban mandates, before narrowing our focus to decentralization and urban governance in sub-Saharan Africa. We then interrogate Harare as a case study, drawing on two rounds of interviews in 2015 and 2022 to identify key aspects of Harare's infrastructure crisis, which we tie to its unfunded mandates. We conducted 51 semi-structured expert interviews, and 4 extensive focus groups with a total of 32 people in order to revisit key themes that were prevalent during the first round of interviews. This was complemented by a review and analysis of national and city budgets and other relevant reports to demonstrate trends on revenue generation, capital expenditure and dynamics around intergovernmental fiscal transfers (IGFTs). We offer novel insights into Harare's infrastructure crisis, while also raising several urban financing and decentralization themes that are applicable from a global perspective.

The Impact of Intergovernmental Transfers on Fiscal Behaviour of Local Government in Ethiopia

This paper examines the effect of intergovernmental fiscal transfers on the fiscal behaviour of local governments in Ethiopia for the period 2004-2018. The empirical findings suggest that central government grants bolster state-level employment and expenditure. However, grants from the central government to states do not crowd out state-level revenue collection. Hence, this paper argues that fiscal decentralisation in Ethiopia has mostly, at least in theory, taken the form of devolution of the power to tax and spend public money. However, on average state-level revenue can only finance up to 26 percent of their annual expenditure. As a result, fiscal federalism in Ethiopia appears to be a delegation of spending responsibilities. It must be considered in a decentralized tax system, but with a transfer scheme and political hierarchy. The results are robust to alternative econometric estimation techniques.

Revenue Mobilization and Contribution Patterns in Nepal

The objective of this article is to evaluate the revenue mobilization efforts in Nepal and understand the contribution patterns of various revenue sources. In this article data of gross domestic product (GDP) and total revenue for the fiscal years 2017/18 to 2021/22was collected from publication of IRD of Nepal. It examines key aspects of fiscal federalism, including revenue collection rights, revenue sharing, and intergovernmental fiscal transfers, as governed by the Intergovernmental Fiscal Arrangement Act. The study assesses government revenue as a percentage of GDP, tax revenue efficiency, and the role of the Internal Revenue Department (IRD). It also explores the composition of revenue, distinguishing between tax and non-tax sources. The findings reveal a positive trend in revenue mobilization, with tax revenue playing a significant role. The findings contribute to understanding Nepal's revenue mobilization efforts and the composition of its revenue sources, providing insights into the country's fiscal policies and financial sustainability.

Intergovernmental Fiscal Transfers and Tax Collection of Indian States: Estimation from Panel Data Models

Abstract This study tries to empirically estimate the effects of the composition of intergovernmental transfers on tax collection across the Indian states by using panel regression model. As intergovernmental transfers constitute almost 47 per cent in total revenue of the states, it could play a vital role in states’ own tax collection. The impact of different channels of federal transfers on tax capacities is examined among 25 Indian states over the period from 1991-92 to 2017-18. The study also attempted to capture the asymmetric effect of various forms of transfers, but findings reveal that only state plan grant has a significant effect on its own tax collection. The empirical evidence suggests that the composition of intergovernmental transfers has a dampening effect on states’ own tax revenue. Apart from transfers’ variables, the study incorporates socio-economic and certain political variables to estimate states’ own tax collections.

Budgetary Systems of the Eastern Russian Regions during the Pandemic Crisis 2020-2021: Territorial Projection

The article presents an analysis of the dynamics of the state and structure of budget revenues and expenses of the Eastern Russian regions during the pandemic period of 2019-2021. Budget analysis was carried out using statistical and empirical research methods based on Federal Treasury data on the execution of the consolidated budgets of the regions of the Russian Federation and the budgets of territorial state extra-budgetary funds. By the end of 2021, the structure of the revenue side of budgets in most regions had practically recovered to its pre-Covid state. Personal income tax remained one of the most stable sources of income in the eastern regions: even in the first year of the pandemic, almost all regions showed a positive trend in its revenues. It is expected that the contribution of such a source as Taxes, fees and regular payments for the use of natural resources will be significant. The losses of the budgets' own revenues in 2020 were compensated for by most regions through intergovernmental fiscal transfers. In 2021, there was a recovery and even an increase in own income relative to 2019, mainly due to tax revenues. However, the positive dynamics of the eastern regions’ own incomes did not reduce their dependence on federal assistance, the scale and directions of growth of which vary greatly by type and region: in some regions its volumes increased, in others they sharply decreased. In the structure of gratuitous assistance, the share of subsidies has decreased and the share of subsidies and other intergovernmental fiscal transfers has increased significantly. The volume of budget expenditures during the pandemic period increased in almost all regions. The dynamics in the functional budget expenditures structure in the regions are very different: significant changes occurred in the Chukotka Autonomous Okrug, the Jewish Autonomous Region, the Republic of Buryatia, the Trans-Baikal Territory and the Amur Region. The budget systems of the Eastern Russian regions have demonstrated their viability and stability, which allowed them to withstand the shocks of the pandemic, resist external and internal threats, and increase the filling of budgets with their own sources and, in general, with the help of interbudgetary transfers, fulfill obligations in accordance with their powers.

Региональное неравенство исполнения федерального бюджета в субъектах Российской Федерации

Federal budget expenditures in regions are not reduced to intergovernmental fiscal transfers to the budgets of the constituent entities of the Russian Federation. A significant part of the federal budget is spent directly in regions to support the expenditure commitments of the Russian Federation. The study aims to describe inter-territorial redistribution of financial resources and assess the contribution of the federal budget to regional per capita consumption by analysing data on 76 Russian constituent entities for 2016-2019. The article ranks regions according to the indicators of the federal budget per capita, estimates the ratio of federal and regional budgetary resources and tests the hypothesis about the impact of federal expenditures on regional per capita consumption. The following negative effects and trends were identified. Regions receive significantly less federal funds than the federal budget; the number of constituent entities with federal budget surplus increased. The regional inequality in terms of the federal budget execution indicators is growing: the gap between the maximum and minimum values of federal budget revenues per capita by region increased from 62 to 74 times; the gap between per capita expenditures is about 6 times. The disincentive effect of redistribution is strengthening due to increased withdrawals of income generated in donor regions and reduced spending of federal resources in recipient regions. Federal budget expenditures amplify the inequality in regional per capita consumption. Maximum and minimum specific values of the total federal and regional budget expenditures in regions differ by more than 10 times. The identified effects lead to an increase in regional inequality in the Russian Federation. According to the research results, intergovernmental redistribution mechanisms should be improved taking into account direct federal budget expenditures in regions.

Educational inequality in Indonesia: are intergovernmental fiscal transfers effective in reducing the gap?

ABSTRACT The study investigates the effectiveness of intergovernmental fiscal transfers for reducing educational inequality in Indonesia. Using panel data of 34 provinces of Indonesia from 2011 to 2019, this study examines how intergovernmental fiscal transfers, namely, the General Allocation Fund (DAU), Special Allocation Fund (DAK), and School Operational Assistance Fund (BOS), can influence the education Gini ratios, representing the distribution of educational equity. Applying the generalised method of moments estimation, the study shows that the DAU and DAK increase educational inequality owing to ineffective formulation and utilisation. Fortunately, the BOS can effectively reduce educational inequality since it is used to finance school operations and provide free education for citizens. The study suggests the need to improve local government spending on education towards more non-routine expenditure to increase the quantity and quality of education. Several improvements are required in teacher and school management and budget planning, followed by regular monitoring and evaluation.

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.

Intergovernmental Fiscal Transfers and Decentralization Initiatives in Sub-Saharan Africa: A Case Study of SNGs in Kenya

<p>Intergovernmental fiscal transfer is a pillar of fiscal decentralization initiatives in developing and transition economies. These transfers serve several functions that include: correcting the vertical and the horizontal fiscal balances, compensating or offsetting for the spill-overs or externalities between different jurisdictions, funding national priorities and administrative priorities and capacities of the national. However, SNGs in developing countries particularly in Sub-saharan Africa is struggling with fiscal decentralization initiatives due to the lowered potential of local revenue generation. Due to these gaps in studies on Intergovernmental Fiscal Transfers (IGFT) in devolved government structures, the study evaluated how IGFT is organized and structured in Kenya. The study adopted a descriptive design and undertook a review of publicly available data which was supported by interviews of selected directors from the budget, finance and planning departments in three county governments of Baringo, Kiambu and Vihiga. The study established that intergovernmental fiscal transfers make up 87 per cent of SNG revenues, equalization fund is about 2 per cent while own source revenues make up 10 per cent. Other revenue sources are conditional transfers in form of ad hoc and cost-reimbursement approaches from both the national government and development partners. Regarding intergovernmental fiscal transfers, the national government should disburse funds in a timely and efficient manner to enable county governments to fulfil their mandates. The study makes the following conclusions; there is an overreliance on intergovernmental fiscal transfers by SNGs and this might constrain their capacity to provide services and impede devolution initiatives; the formula-based unconditional grant in Kenya offers great prospects for devolution and the rise in unconditional transfers portends well for SNGs. The study recommends that SNGs speed up the legal mechanism for identifying and classifying and assigning local revenues, the national government should consider introducing or substituting fiscal transfers with the tax-sharing arrangement to incentivize revenue diversification among SNGs and lastly, SNGs should consider pooling of resources to incorporate special purpose vehicles for sub-national government borrowing. The study contributes to the existing knowledge by delving more into the elements of fiscal decentralization and in particular intergovernmental fiscal transfers. Recommendations for further studies include studies on how other elements of decentralization impact the performance of the counties, how decentralization is improving governance at the local level and how the East African Community may affect governance and service delivery at the sub-national levels.</p>

How do fiscal decentralization and intergovernmental fiscal transfers affect energy consumption in China?

Since the reform of the tax-sharing system in 1994, the regulation of the central government to local governments has relied on the mean of intergovernmental fiscal transfers (IFTs) to a certain extent. However, the existing literature has not yet explored the influence of fiscal decentralization (FD) on energy consumption in the presence of IFTs. Thus, this study empirically examines the influences of FD and IFTs on energy consumption by using panel data for 30 Chinese provinces during the period of 1998–2019. Results indicate that FD and IFTs have positive effects on energy consumption. Moreover, the positive influence of FD on energy consumption is strengthened by the improvement in IFTs. In addition, FD and IFTs affect energy consumption through industrial structure upgrading. In terms of policy implications, this study suggests that China may further reduce energy consumption by appropriately reducing the degree of FD, optimizing the intergovernmental fiscal transfer system, and promoting the upgrading of industrial structure.

How does vertical fiscal imbalance affect energy consumption in China?

Evaluating the influencing factors of energy consumption at the system level has become a focus in high-quality economic development. However, the existing literature has not yet explored whether and how vertical fiscal imbalance (VFI) affects energy consumption. Thus, we aim to address this gap. We empirically examine the effect of VFI on energy consumption and its possible mechanisms by using China’s panel data at the province level from 1998 to 2018. We find that VFI significantly increases energy consumption, but this influence has evident regional heterogeneity. Moreover, VFI indirectly affects energy consumption through industrial structure upgrading, and the positive influence of VFI on energy consumption is strengthened by the improvement in intergovernmental fiscal transfers. These findings give political references to deepen fiscal reform, reduce energy consumption, and implement strategies for energy saving and emission reduction.

Capitalization of local government grants on land values: Evidence from Tokyo metropolitan area, Japan

This study investigates the capitalization effect of intergovernmental fiscal transfers from central to local governments on land prices. Using a drop in the size number of fiscal transfers following fiscal reform in the early 2000 s, this study examines the extent to which unconditional fiscal transfers to municipalities in the Tokyo metropolitan area are attributed to land prices. The result shows that the decline in the transfer has decreased the land prices in the municipalities. Furthermore, reducing one unit in the per capita grant reduced the value of housing area per capita by one or more units, even if the real discount rate was assumed to be as low as 2%. Therefore, the fiscal transfer reform more negatively affects the benefits of residing in a municipality in the area than the reduction amount in the transfer.

Assessing the effectiveness of regulation of inter-budgetary relations in the Russian Federation constituent entities in conditions of instability

Subject. This article considers the peculiarities of regulation of inter-budgetary relations in the constituent entities of the Russian Federation in the conditions of an unstable economic situation. Objectives. The article aims to form an approach to assessing the effectiveness of the distribution of transfers from regional budgets in current conditions. Methods. For the study, we used the methods of analysis and synthesis, analogy, comparison, and grouping. Results. The article offers recommendations for the formation and improvement of the approach to assessing the effectiveness of the distribution of intergovernmental fiscal transfers between municipalities. Conclusions and Relevance. The proposed approach to assessing the effectiveness of inter-budgetary relations in the region can help comprehensively assess the effectiveness of the provision and use of inter-budget transfers to municipalities. This makes it possible, if necessary, to promptly adjust the distribution of funds between municipalities in an unstable external environment. The proposed approach to assessing the effectiveness of the distribution of intergovernmental fiscal transfers between municipalities should be used in the activities of regional authorities in the development of relevant regulatory documentation, as well as in the practice of financial interaction between regional and local authorities.

An estimation of expenditure needs for Argentinian provinces: A structural modeling approach

Since 1994 Argentina has failed to honor its Constitution by not passing a law that fully determines intergovernmental fiscal transfers at a national level. This paper uses an innovative structural framework to estimate, and ultimately propose, a new distribution scheme for such transfers. The structural approach allows for the recovery of deep parameters to accurately estimate the expenditure needs for each province, which can then be used to establish the distribution rates that should be assigned to each jurisdiction.

Capitalization of Local Government Grants on Land Values: Evidence from Tokyo Metropolitan Area, Japan

This study investigates the capitalization effect of intergovernmental fiscal transfers from central to local government into house prices. The extent to which unconditional fiscal transfers to municipalities in the Tokyo metropolitan area are attributed to land prices will be examined using the event of a drop in the size amount of fiscal transfers following the fiscal reform in the early 2000s. The result shows that the drop in the transfer has decreased the land prices in the municipalities. Furthermore, a reduction of one unit in the per capita grant decreased the value of housing area per capita by one or more units, even if the real discount rate was estimated to be as low as 2%. We can conclude that the fiscal transfer reform focused on in this paper had a more negative impact on the benefits of residing in a municipality in the area than the amount of the reduction.

Achieving the climate goal with intergovernmental transfers to the forestry sector: insights from the Indian experience

Forests play an important role in both mitigation and adaptation to climate change. India is amongst a select group of countries that have experimented with intergovernmental fiscal transfers to support forest conservation. Well-designed transfers have important implications for the achievement of national and international commitments for forest conservation, the well-being of communities and climate mitigation. A substantial amount, USD 51 billion was allocated for devolution from the Union (Government of India) to the subnational (state) governments against the forest cover criteria for the period 2015–2019. Evidence indicates that this substantial devolution did not guarantee fund flows to the forestry sector nor result in an appreciable increase in conservation outcomes in states that benefited the most from the transfers. We conduct an in-depth empirical analysis which demonstrates that the design of the transfer is crucial in determining outcomes. Findings indicate that conservation and afforestation outcomes are likely to be better when the ecological values, the bulk of which are carbon values, are incorporated upfront in financial allocation decisions. Indirectly incentivizing subnational entities by compensating them for maintaining land under forests is a much weaker approach that may not lead to the desired outcomes. Our findings are relevant since the next phase of allocation through fiscal transfers is under active consideration. Ensuring design compatibility in financial transfers complements and links up well with international goals to achieve climate mitigation through REDD+, as well as domestic priorities for achieving the SDGs.

Ecological Fiscal Transfers and State-level Budgetary Spending in India: Analyzing the Flypaper Effects

Using panel data models, we analyze the flypaper effects — whether intergovernmental fiscal transfers or states’ own income determine expenditure commitments — on ecological fiscal spending in India. The econometric results show that the unconditional fiscal transfers, rather than the states’ own income, determine ecological expenditure in the forestry sector at subnational levels in India. The results hold when the models are controlled for ecological outcomes and demographic variables.

Flypaper Effect of Intergovernmental Transfers and Incentives to Improve Own-Source Revenue Mobilization of Local Governments in the Central Region of Ghana

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.

Local Tax Reforms and Intergovernmental Fiscal Transfers Policy: The Relevance of Governance Forum

This study invokes fiscal federalism literature by examining tax reforms-intergovernmental fiscal transfers policy relationships in local government. Additionally, it investigates whether the governance forum mediates that association. Employing structural equation modeling, data from eight districts, two municipalities, and 80 sub-counties in Uganda’s North-Western region were tested. For quite a long time, Uganda; an East African country, has been acclaimed for its federalism proficiency. Findings indicate that: much as tax autonomy, coordination capacity, tax inconsistency, and corruption; notable tax reforms attributes, predict transfers policy changes, governance forum plays no mediation role in the tax reforms-transfers policy set-up. Implications for theory-research-practice triangulation are discussed and future research direction has also been proposed.

Intergovernmental fiscal transfers and CO2 emissions in China

Effectively evaluating the influencing factors of environmental pollution at the system level has become a hot topic in sustainable socioeconomic development; however, none of the existing studies have attempted to explore the relationship between intergovernmental fiscal transfers and environmental pollution. In this work, we aim to address the research gap from theoretical and empirical perspectives. Under the framework of endogenous growth theory, we first analyze the dynamic relationship between intergovernmental fiscal transfer ratio and the environment. Findings demonstrate that intergovernmental fiscal transfer ratio and environmental pollution have a bell-shaped relationship. We then conduct an empirical investigation of CO2 emissions with panel data for China’s 30 provinces for the period of 1998–2017 by combining spatial econometric methods. The robust empirical results support the aforementioned theoretical findings. The findings of this work may help the central and provincial governments of China in addressing CO2 emission problems by using a reasonable intergovernmental fiscal transfer ratio.