Chapter 15: On the Implementation of Transfers to Subnational Governments
Ehtisham Ahmad and Bob Searle 1 Objectives and context A variety of grants instruments can be observed across the globe. The magnitude and type of grants depend considerably on the context – often on the extent to which subnational administrations have access to adequate ownsource revenues in relation to their constitutional or assigned responsibilities. Grants may also serve to address the policy objectives of higher levels of government. And, as both revenue assignments and expenditure responsibilities are frequently reviewed or reformed, even in the developed countries, there needs to be a constant evaluation of the need for transfers and the mechanisms used to implement grants systems. While there are attempts to institutionalize the arrangements for the determination of grants, it is evident that political economy considerations play a significant role in the design of grants systems. However, poorly designed grants systems can have a negative impact on incentives for efficient management of public finances as well as on overall macroeconomic outcomes. Grants to subnational governments are used to serve multiple goals. Often these goals are partially unrelated and they can be conflicting. They include: • equity considerations and the reduction (or elimination) of vertical and horizontal imbalances; • the correction of spillovers; • the implementation of centrally determined standards for public services; and • the enhancement of tax effort and expenditure efficiency. To reconcile these goals, combinations of revenue sharing, and special-, and general-purpose grants tend to be used. Revenue sharing is often used to address vertical imbalances. General-purpose or unconditional grants are useful in...
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