Subnational Government Structure and Intergovernmental Fiscal Relations

Many countries around the world are currently engaged in one way or another in policy debates or reforms of their system of intergovernmental fiscal relations. While the policy dynamics vary greatly from country to country, the focus of such reform efforts can generally be categorized into one of the four main dimensions of intergovernmental fiscal relations, namely the assignment of functional responsibilities (expenditure assignments), the assignment of revenue sources, the provision of intergovernmental fiscal transfers, and the regulatory framework for subnational borrowing and debt. Based on the mantra that “finance should follow function,” the conceptual starting point of fiscal decentralization reforms is generally held to be the assignment of expenditure responsibilities, which seeks to address the question what functions and expenditure responsibilities should be assigned to each level of government (Bahl 1999). However, a preceding question that is often overlooked pertains to the structure of subnational governments: how should the government sector be structured in order to ensure that fiscal decentralization reforms will result in a more efficient allocation of public resources?