Perspectives on the design of intergovernmental fiscal relations

The way taxing and spending authorities are delineated and the manner in which intergovernmental transfers are structured in a country have come to be recognized as fundamentally important in the efficient and equitable provision of public services. The objective of this paper is to provide a broad framework in assessing intergovernmental fiscal arrangements in individual countries and also to develop general guidelines in helping developing nations chart their own courses of actions in their reforms. With the major exception of centrally planned economies in transition to market economies, one does not expect that these arrangements will be fully restructured in any developing economy, yet major economic gains may be possible in some countries by simply fine tuning the existing structure of intergovernmental transfers without reassigning expenditure and taxing responsibilities. The paper includes a discussion of the tax and expenditure assignment issues and tax base and revenue sharing mechanisms. The conceptual basis of expenditure assignment is discussed first and any special problems of this nature observed in selected countries are highlighted. The paper is concerned with the theory and practice of intergovernmental transfers and provides a taxonomy of grant programs based on their objectives. It also provides evidence on vertical and horizontal fiscal imbalances and an impressionistic view of fiscal arrangements in selected countries.