FISCAL DECENTRALIZATION

FISCAL DECENTRALIZATION
 Involves shifting some responsibilities for expenditures and/ or revenues to lower levels
of government. One important factor in determining the type of fiscal decentralization is the
extent to which sub-national entities are given autonomy to determine the allocation of their
expenditures.

 Is a transfer of responsibility for fiscal policies from the national level to the
region, sub-region, or local levels.
 It should be assessed according to the degree of autonomy in designing,
delivering and financing spending programs.

DECENTRALIZATION IT IS TRANSFER OF POWER AND

AUTHORITY FROM CENTRAL INSTITUTION TO
LOWER OR LOCAL LEVELS OF GOVERNMENT
SYSTEM. ITO ANG PINAPASA AY POWER AT
AUTHORITY MULA SA MATAAS NA AHENSIYA TO
PINAKAMABABA NA AHENSIYA.
Forms of decentralization
1. Devolution
- it is the transfer of power and authority from the national government to local
government units (LGU’s)

ANG DE AY TRANSFER OF POWER FROM NATIONAL TO

LGU. HALIMBAWA KPAG ANG MALACANANG PALACE AY
NAG-UTOS NA HUHULIHIN ANG MGA ADIK OR ANG
ACTIVITIES NA RELATED SA ILLEGAL DRUGS, IBINABABA
YUN SA LGU THEN LGU WILL PERFORM THE SAME TASK.
ANG TAWAG DOUN AY DEVOLUTION BINIGYAN NG
NATIONAL NG POWER ANG MGA LGU.
2. DE Concentration
- it is the transfer of power, authority or responsibility or the discretion to plan, decide
and manage from central to local levels; administrative and sectorial.
DITO NAMAN HALOS PAREHAS DIN POWER AND AUTHORITY
ANG DINAGDAG AY RESPONSIBILITYAND DISCRETION TO
PLAN. SO KUNG MAY BABAGUHIN HALIMBAWA YUNG
KANINA PINAG-UTOS NG MALACANANGNA HULIHIN ANG
MGA GUMAGAWA NG RELATED SA ILLEGAL DRUGS SO
KAPAG ANG DECONCENTRATION GINAWA BIBIGYAN PARIN
NG POWER AND AUTHORITY YUNG LOCAL GOV’T UNITS.
YUN NGA LANG KUNG MAY BABAGUHIN SILA, MABABAGO
NILA. HALIMBAWAGINAWA NG MALACANANG KUNG SAAN
NAGLABAS SILA NG GENERAL COMMUNITY QUARANTINE
DIBA? SO MAY TINATAWAG DIN TAYONG MODIFIED, ANG
TAWAG DOUN DE CONCENTRATION BINIGYAN NG CHANCE
ANG MGA LGU NA MAG DECIDE DAHIL MAY POWER SILA NA
AUTHORITY AT THE SAME TIME RESPONSIBILITIES
THEREFORE THEY HAVE THEIR OWN OR OLD PLAN PARA
BAGUHIN ITO. YUN NGA LANG DAPAT RESPONSIBLE SILA .
3. DE Bureaucratization
- it is the transfer of some public functions and responsibilities, which government
organizations (NGO’s).
SO DE Bureaucratization PINAPASA NG NG GOBYERNO ANG FUNCTION AND
RESPONSIBILITY SA ISANG NGO LALO NA KUNG NAKAKATULONG ITO NA
NGO. ANG HALIMBAWA JAN IS YUNG ISANG DEPARTMENT OF HEALTH
PINAPASA YUNG IBA SA IRPF THEN YUNG YUNG SA KURYENTE DIBA MAYRUN
TAYONG AHENSIYA JAN YUNG AHENSIYA JAN AY PINASA SA MERALCO PARA
MAKAPAG DECIDE SA ISANG CITY. MERALCO IS NON GOV’T ORGANIZATION
Fiscal decentralization takes a number of forms:
 self-financing or cost recovery through user charges;
 Co-financing or co-production with private sector;
 Expanding local tax and non-tax revenues;
 Intergovernmental transfers; and
 Local borrowing.
Principles for transparency
• Each level of government should have clearly assigned responsibilities, regardless of what
responsibilities are assigned to government as a whole.
• Fiscal and revenue-sharing arrangements between the central and local governments should
be stable.
• National law should provide standard accounting and budgeting rules for subnational
governments.
• Incentives for increased efficiency are needed.
• Revenue assignment should be fully consistent with expenditure assignment; and
•Sufficient resources should be assigned to subnational governments to allow them to fulfil
their duties.
•Dumping of the fiscal deficit should not be permitted
•Special mechanism is needed to control local government borrowing.
•In case of local government budget overruns or accumulation of arrears occurs, the law
should stipulate sanctions or emergency measures.
•A sound reporting and accounting system is critical.
•Consolidating the expenditure of the different levels of government is necessary also for
policy analysis, especially in decentralized systems and federal countries.
Potential benefits of fiscal decentralization
 Efficiency
fiscal decentralization service efficiency and people’s economic welfare, as local
governments can better suit the differing tastes and preferences of residents and are more
responsive to the public.
 Revenue mobilization
A decentralized tax structure may lead to more effective tax administration and hence,
with the same overall tax rates, greater revenue.
 Resource allocation and equity
This improves the allocation of resources and fostering economic growth, while tailoring
charges to ability to pay.
POTENTIAL COSTS OF FISCAL DECENTRALIZATION
 Efficiency
 fiscal decentralization can worsen efficiency when local bureaucracies are unresponsive,
technically and managerially deficient, and poorly motivated – as they are in many
developing countries and several developed countries.
 Poor resource mobilization
any revenue gained by expanding the tax base to include small taxpayers can be more
than offset by the loss of revenue from underpayment of tax by wealthy people.
 Regional inequalities
fiscal decentralization fosters regional inequalities and may lead to unequal treatment of
individuals.
 Resource Allocation
local government may be unable to build to proper standards and adequately maintain
infrastructure and services.
IMPLEMENTING FISCAL DECENTRALIZATION
• A number of problems arise in implementing decentralized revenue and expenditure
assignments,
• The major ones are:
1. Fiscal gap (vertical imbalance)
2. Fiscal inequities (horizontal imbalance)
 Fiscal gaps (vertical imbalance)
-fiscal gaps are the result of inconsistent tax and expenditure assignments.
-the mismatch of expenditure and revenue assignments that leads to vertical imbalances
also leads to fiscal inefficiency and can distort business and investment decisions.
 Fiscal inequities (horizontal imbalance)
-This may arise from revenue differences between local governments with different tax
bases, different technical and administrative capabilities to collect taxes, or different costs
and demand for local public services.
Vertical imbalance- expenditure assignment
• The main guiding principle is to assign each type of expenditure responsibility to the
level of government that would benefit only the residents that it represents.
• This is the general principle of local benefit.
• Purely local expenditure responsibilities should include water, sewer, waste, and fire
protection services.
• Central expenditure should be those whose benefits extend nationwide.
Vertical imbalance- tax assignment
• The tax assignment approach entails that sub-national governments:
(i)choose tax base, (ii)access the tax base, (iii)decide the tax rate, (iv)collect the tax, and
(v) retain tax proceeds.
• Revenue sharing can be on a:
(i) derivation basis, where sharing is based on the source of tax proceeds;
(ii) grant basis, where the central government distributes the revenues to all subnational
government based on a formula; or
(iii) piggyback system, where subnational government are allowed to add a rate onto the
central tax and receive the full amount raised from the piggyback.
• Taxes assigned to central government should:
(i)cover mobile tax bases to avoid movements of factors of production and tax
competition;
(ii)cover tax bases that are unevenly distributed across regions. E.g., taxes on natural
resources.
• Correspondingly, local taxes require:
(i)a relative immobile tax base;
(ii)an adequate tax yield to meet local needs and the buoyancy to grow at least at the
same rate as expenditures;
(iii)a stable and predictable tax yield over time;
(iv)relatively easy administration, and
a non-exportable tax burden on non-residents
Horizontal imbalance- fiscal transfers
• Intergovernmental fiscal transfers are instruments to correct the horizontal or vertical
imbalances in the fiscal capacities of different sub-national governments.
• These fiscal transfers can be broadly grouped into revenue-sharing arrangement and
grants.
• Grants can be conditional or unconditional, and open-ended or subject to ceilings.
• More important than just filling fiscal gaps, however, is the role of fiscal transfers in
redistributing resources.