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Roles and Expenditures across Levels of Government. Presentation for: Public Expenditure Analysis and Management Course Monday, May 21st, 2006 4-5:00 pm . Presented by: Kai Kaiser, Economist Public Sector Group Poverty Reduction and Economic Management Network (PRMPS)

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Roles and Expenditures across Levels of Government

Presentation for:

Public Expenditure Analysis and Management Course

Monday, May 21st, 2006

4-5:00 pm

Presented by:

Kai Kaiser, Economist

Public Sector Group

Poverty Reduction and Economic Management Network (PRMPS)

kkaiser@worldbank.org


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Overview

  • A. Intergovernmental Fiscal Systems

    • Levels of Government

    • Roles & Responsibilities

  • B. Sub-National Expenditure Assignments

    • Principles & Issues

    • Empirical Evidence

  • C. Doing PERs in Decentralized/Sub-National Contexts

    • Diverse Approaches

    • Public Expenditure Management versus Sectoral Lenses

    • Special Issues to Consider

  • D. Intergovernmental Transfer Systems

    • Vertical Imbalances and Own Source Revenue Mobilization

  • E. Assessing Fiscal Decentralization

    • Design, Implementation, Diagnosis

    • Top-down versus Bottom Up Accountabilities


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Decentralization A World-Wide Phenomenon

  • Underway in over 85 countries

    • Often evolving process

  • Political and economic rationales

  • Varieties

    • Deconcentration

    • Delegation

    • Devolution

    • Privatization

  • Spans political/legal, fiscal, administrative…


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Four Pillars of Intergovernmental Fiscal System

  • Expenditures

  • Revenues

  • Intergovernmental transfers

  • Subnational borrowing/debt


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Expenditure Assignments

  • Macroeconomic stability

  • Public Service Delivery

    • Effectiveness/Efficiency

    • Public Management Innovation

  • Poverty Reduction

    • Responsiveness

    • Equalization


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State Architectures

  • Federal versus Unitary

    • Legal/Constitutional Status of Sub-Nationals?

  • Tiers of Government

    • # Levels

    • Scale

  • Devolved versus Deconcentrated Structures

    • Territorial Organization

    • Functional Agencies


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Expenditure Assignment Issues

  • Design

    • Public goods, externalities, economies of scale, public sector competition

    • Ideally, services should be provided at lowest level of government where benefits lie (subsidiarity)

    • Revenue & Expenditure Assignment Design Will Differ

  • Practice

    • Ultimately, no single best assignment

      • Provision “Technologies” May Change Over Time

      • Preferences/Needs May Evolve

    • Clarity in expenditure assignment often lacking

      • dejure versus defacto

    • Significant expenditure responsibility needed for autonomy

    • Public provision doesn’t imply public production

      • Contracting Out


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Macroeconomic Stability

  • Key factor is “hard budget constraint”

    • Hierarchical versus Market Based

  • Creates incentives for subnational fiscal discipline

  • Limits risk of central government

  • Can be “softened” through several channels (intergovernmental fiscal system, financial system, SOEs, borrowing, etc.)


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Matching local needs and preferences with local public expenditure patterns

Assumes

Substantial fiscal autonomy/budgeting

Political decentralization

Are elections held?

How are candidates selected?

Intra-party hierarchical control mechanisms?

What do elections mean?

“Bottom-up” Accountability

Allocative Efficiency (Subsidiarity)


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Decentralized Assignments

Amount: Which Level of Government Decides Amount?

Structure: Which Level of Government Defines Structure?

Recurrent/Capital?

Execution: Which Level of Government Executes the Expenditure?

Supervision: Which Level of Government Supervises and Sets Standards?

Country and Sectoral Contexts Provide for Significant Diversity in Arrangements


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Decentralization Trends

Source: International Monetary Fund. Government Finance Statistics Year Book , various years, Country Tables


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Differences Across Regions

Subnational Share of Expenditures

Subnational Share of Revenues

Note: Simple average of most recent observations in available countries. Numbers in parenthesis indicate number of countries represented. Figure do not typically include deconcentrated spending.

Source: International Monetary Fund. Government Finance Statistics Year Book 1998, Country Tables.


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International Diversity


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Decentralized Social Sector Expenditures

Source: IMF GFS


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Unbundling Expenditure Assignments


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Comparative Assignments


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Designing PERs in Contexts with Significant Sub-Nationals

  • National PERs to Get at Consolidated Fiscal Picture

    • How large is sub-national sector?

      • Estimates of Own source revenues

  • PERs Focusing on Sub-National Diversity

    • Decentralizing Indonesia (2003)

    • Nigeria State Finances Study (2003)

  • State-Level PERs

    • E.g., South Asia: India & Pakistan

  • Local Government Finance/PFM Assessments

    • India Fiscal Decentralization to Rural Governments (2004)

    • Uganda Integrated Fiduciary Assessments (2005)


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Public Expenditure Management Lens

  • Clarity in expenditure assignment?

  • Adequacy of resources?

  • Formula-based transfer system?

  • Hard budget constraint?

  • Budgeting and reporting systems

    • Uniformity vs. flexibility

    • Carrots vs. sticks

  • Procurement

    • E.g., Contracting Out

  • Sub-National Fiscal/PFM Diagnostics

    • Adopting the PEFA Framework to Special Context of Sub-Nationals

    • Diversity Across Sub-Nationals

    • Data and Effort Challenges!


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Service Delivery Lens

  • Decentralization

    • Allocative efficiency effects

    • Intergovernmental fiscal framework

    • Sufficient capacity

  • “Technology”

    • School autonomy/community participation

    • Purchaser/provider split in health

    • Incentives for service providers

  • Institutional structures

    • Civil service, budgeting and financial management processes, performance incentives

    • Resources reach front-line service providers (PETs)?

  • Accountability


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Rationales for Intergovernmental Transfers

  • Vertical imbalances

  • Horizontal imbalances

  • Inter-jurisdictional spillovers (externalities)

  • Enhancing national objectives at the subnational level

  • Paying for national programs implemented by subnational governments


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Local Revenue Issues

  • Own resources typically inadequate to carry out assigned functions

    • Striking variations in size and capacity – one size doesn’t fit all

    • Local revenues often inelastic, and not adequately responsive to changing needs

  • Local revenue mobilization strengthens accountability

    • Link taxes with benefits derived from local government services

  • Simplest and most effective form of tax autonomy: discretion to set tax rates


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A “Good” Transfer System

  • Transfers should be transparent and predictable (formula-based)

  • Equalization transfers should include

    • A measure of “need”

    • A measure of “capacity”

    • Adequate sub-national revenue autonomy

    • Stable but flexible financing

  • Avoid a proliferation of conditional grants


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Equity

  • Extent of fiscal equalization

    • Expenditure Needs

    • Fiscal Capacity

  • Ways and means for targeting poor places and poor people


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Decentralization Challenges

  • Balance responsibilities with resources, capacity and accountability

    • Subsidiarity

    • Finance follows function

    • Responsibility with capacity (learn by doing)

    • Accountability through political channels, own source revenues, participation and transparency

  • Create incentives for implementation to match formal arrangements


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Positive or Negative Outcomes?

  • If designed well, decentralization can

    • Move decision making closer to people (subsidiarity principle)

    • Enhance efficiency and responsiveness of service delivery

    • Enhance State Legitimacy/Accountability

    • Improve economic growth

    • Potentially alleviate poverty


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But, good design is complicated

Decentralization spans

  • Political/Legal

  • Fiscal

  • Administrative

    policies and institutions…


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Overarching Considerations

  • Strategies

    • Objectives?

    • Champions

    • Early design has long-run implications

    • Sequencing/Priorities (esp. w/ low starting capacity)

    • Monitoring & Evaluation / Base-lining

  • Managing Change/Long Run Process

    • New modes of operating

  • Expectations

    • Credibility that LGs can deliver services?

      • Capacity, Accountability, & Resources?

      • Post-Conflict Context

      • Phasing


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Elite capture (by ethnic/racial/social groups)

Opaque or arbitrary decision-making

Constituents, villagers, communities unable to hold representatives accountable due to incomplete information

Corruption

Patronage politics

Excessive discretion to reward friends, punish rivals

Central civil servants over-rule local representatives

Common Dangers


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Decentralized Accountability Mechanisms

  • Top Down

    • Central Supervision

    • Reporting

    • “Minimum Standards”

  • Bottom Up Accountabilities

    • Electoral Insufficient

    • Proximity versus Scale/Capacity


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Leveraging Transparency

  • Spatial Allocation of Public Resources

  • Sectoral Differences

    • Health versus Education

  • Public LG meetings, citizen fora

  • Participatory Budgeting

  • Publicize voting records

  • Mobilize own source revenues

  • Financial disclosure (improved budgeting)

    • E.g., Annual Review Reports

  • Freedom of Information Acts and/or other public disclosure laws (assets, affiliations)

  • Monitoring by vigilance committees, NGOs, CBOs, media

  • Media


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Q & A + Further Resources

  • Decentralization & Sub-National Economics Thematic Group Website

  • Sign-up for Decentralization & Sub-National Economics TG

  • AskGov


  • Login