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Anwar Shah, OEDCR 1
Intergovernmental Transfers
Anwar Shah, World Bank
Anwar Shah, OEDCR 2
Relevance
Dominant source of subnational revenues in many countries.
Design matters for efficiency and equity.
Grant design must be consistent with grant objectives.
Anwar Shah, OEDCR 3
Importance of transfers Dominant source of revenue for subnational
governments in some countries:
South Africa 85%
Indonesia 72% Provinces 72% Local 85%
Nigeria 67% to 95%
Mexico 70% to 90% (poorer states)
Pakistan 82% to 99% Design of transfers matter for efficiency and equity
and fiscal discipline.
Anwar Shah, OEDCR 4
Grant typesNon-matching transfers: Selective (conditional) General (unconditional)
Selective matching transfers Open-ended Closed-ended
Conceptual impacts General non-matching
higher welfare Selective matching open-ended
higher expend. stimulation
Anwar Shah, OEDCR 5
Grants in LDCs vs DCs
LDCs Passing the buck
transfers (Brazil, India, South African revenue sharing)
Pork barrel transfers (Brazil and Pakistan)
Asking for more trouble (deficit grants and bailouts)
DCs Conditional transfers Equalization transfers
Anwar Shah, OEDCR 6
Criteria for design of transfers
Autonomy Revenue adequacy Equity Predictability Efficiency Simplicity Incentive Safeguard of grantor’s objectives
Anwar Shah, OEDCR 7
Economic rationale of intergovernmental
transfersObjective To bridge fiscal gap
To reduce regional fiscal disparities
Setting national minimum standards
Influencing local priorities
To compensate for benefit spillover
Regional stabilization
Design Reassignment, tax
abatement, tax base sharing Fiscal capacity equalization
Conditional block transfers
Open-ended matching transfers
Open-ended matching transfers
Capital grants with upkeep requirement
Anwar Shah, OEDCR 8
Transfers: Lessons
Grant design must conform to objectives.
Main Arguments and Grant Design
Fiscal Gap: Structural imbalance as a result of a mismatch between revenue means and expenditure needs.
Anwar Shah, OEDCR 9
...Fiscal gap
Reasons:Inappropriate assign: Reassign
Limited tax bases: Allow joint occupancy or tax decentralization.
Tax competition: Federal collection and general (not on a tax-by-tax basis) revenue sharing.
Tax room lacking: Tax abatement and tax base sharing (Canada and Brazil).
Anwar Shah, OEDCR 10
To bridge fiscal gap
Design: (a) Reassign (b) tax abatement(c) tax base sharing.
Better practices: Tax abatement in Canada; tax base sharing in Brazil, Canada, and Pakistan.
Practices to avoid: deficit grants; tax by tax sharing.
Anwar Shah, OEDCR 11
Special issues in state-local transfers
Principal-agent relationship Pass-thru of federal transfers from states desirable
due to better access to data. Considerations in unconditional grant design:
» Classification by population size, municipality type, and urban/rural
» Equal per municipality component
» Equal per capita component
» Service area component
» Fiscal capacity component Considerations in conditional transfers
» Simple objectively verifiable indicators of need
Anwar Shah, OEDCR 12
Indonesia -- General Purpose Transfers
1. Provincial Development Grant» Equal per province (85%)» Area (15%)
2. District Development Grant» Per capita with a floor
3. Village Development Grant» Equal per village
4. Less Development Village Grant» Per capita
Anwar Shah, OEDCR 13
Setting national minimum standards
Design: conditional non-matching block transfers with conditions on standards of service and access.
Better practices: Indonesia roads and primary education grants; Colombia and Chile education transfers; Canada health and post-secondary education transfers.
Practices to avoid: Conditional transfers with conditions on spending; ad hoc grants.
Anwar Shah, OEDCR 14
Education grant
Allocation basis: Population aged 5-17
Distribution: Equal per pupil to both public and private schools
Conditions: Universal access to primary and secondary education
Penalties: Public censure, reduction of grants funds
Incentives: Retention of savings
Anwar Shah, OEDCR 15
Health grant
Allocation basis: Weighted population by age class with higher weights for ages 0-5 and 65+
Distribution: Patient use
Conditions: Minimum standards of services and access to health care
Penalties: Reduction of grant funds
Anwar Shah, OEDCR 16
Indonesia - Specific Purpose Transfers to Provinces
P1. SDO - Subsidy for Autonomous RegionsPublic sector wages
P2. Provincial Road Improvement GrantLength of roadCondition of roadUnit cost of construction and maintenance
P3. Reforestation and Regreening
Anwar Shah, OEDCR 17
Indonesia - Specific Purpose Transfers to Local Governments
L1. SDO - Subsidy for Autonomous RegionsPublic sector wages
L2. District/Town Road Improvement GrantLength of roadsConditionDensityUnit cost
Anwar Shah, OEDCR 18
...Transfers to Local Governments
L3. Primary School GrantSchool age children (ages 7-12)Needs for facilities
L4. Health GrantNeed for medicine, health centres, and
personnel
L5. Reforestation GrantProject review
Anwar Shah, OEDCR 19
Federal financing and health care in Canada
Per capita transfers tied to rate of growth of GDP
Conditions:
(1) Universality
(2) Portability
(3) Public insurance but public/private provision
(4) Opting in and out
(5) No extra billing
Penalties:
Threat of discontinuation for breach of 1-4.
Dollar for dollar reduction for 5.
Sunset clause: Parliamentary review every 5 years.
Anwar Shah, OEDCR 20
Influencing local priorities
Design: Open-ended matching transfers (with matching rate to vary inversely with fiscal capacity).
Better practices: Matching transfers for social assistance in Canada.
Practices to avoid: Ad hoc grants.
Anwar Shah, OEDCR 21
To compensate for benefit spillovers
Design: Open-ended matching transfers with matching rate consistent with spillout of benefits.
Better practices: RSA grant for teaching hospitals.
Practices to avoid: Closed-ended matching transfers.
Anwar Shah, OEDCR 22
Regional stabilization
Design: Capital grants provided maintenance possible.
Better practices: Limit use of capital grants and encourage private sector participation by providing political and policy risk guarantee.
Practices to avoid: Stabilization grants with no future upkeep requirements.
Anwar Shah, OEDCR 23
Capital grants
Special issues in the use of capital transfers to finance infrastructure investments.
Merits: Finance large infrastructure projects Visible No long-term commitment by donors
Demerits: Capital bias Fungibility Distort local priorities Undermine local autonomy
Anwar Shah, OEDCR 24
Improving capital grants
Limit their use Require maintenance plan and user charge policy Matching rate inversely related to fiscal capacity Selection of recipients based on need and capacity
factors and project evaluation Technical assistance Monitoring, inspections, audit, and evaluations Require survey of condition of existing network for
assessment of future needs
Anwar Shah, OEDCR 25
To reduce regional fiscal disparities
Design: General non-matching fiscal capacity equalization transfers.
Better practices: Fiscal equalization programs of Australia, Canada, and Germany.
Practices to avoid: General revenue sharing with multiple factors.
Anwar Shah, OEDCR 26
Fiscal equalization transfers
REGIONAL FISCAL INEQUITY AND NATIONAL FISCAL INEFFICIENCY
ARGUMENT
DIFFERENCES IN NET FISCAL BENEFITS ACROSS STATES (NFBS)
Reasons:
a. Differences in access to source-based taxes such as resource revenues and CIT.
b. Per capita incomes differs differential access to PIT and sales tax.
Anwar Shah, OEDCR 27
c. Fiscal needs different: Proportion of old, young, incidence of disease, terrain factors, etc.
Total Income = Private Income + NFBs
Individuals with identical incomes in two states:
Rich Poor
Private income 10,000 10,000Tax paid 5,000 5,000Per capita exp. 10,000 5,000NFB 5,000 0Total income 15,000 10,000 Fiscally induced migration to RICH state.
Inefficient and inequitable resource allocation.
Anwar Shah, OEDCR 28
Grants rationale
Solution: Fiscal equalization transfers to eliminate
NFBs Allow replication of financial structure of an
unitary state while having decentralized decision making.
Equity and efficiency considerations coincide.
Design of FETs: Must be inframarginal, i.e., no incentive to
change fiscal effort to exploit the system.