What is fiscal decentralisation?

Fiscal decentralisation involves the delegation of spending responsibilities, and some revenue raising powers to subnational governments.  The majority of the world's countries, whether developing, transition or developed, have some form of fiscal decentralisation, especially over the last quarter century.  There are a range of political, social and economic factors that define the fiscal decentralisation arrangements.  Some of the recent decentralisers, such as China, have had lengthy traditions of highly centralised governments.  In other countries, such as Nigeria, decentralisation has allowed the nation a greater ability to accommodate religious and ethnic differences, by allowing more autonomy for some regions.  Overall, decentralisation reflects a desire for more localised democracy and discretion, and for a closer match of public services to citizens’ preferences.

Decentralisation of expenditure responsibilities

Fiscal decentralisation is firstly about more giving expenditure discretion at the local level, rather than at the National level.  Some potential advantages of decentralising expenditures are

• Greater efficiency:  provide public services that are closer to local tastes and needs and are cheaper to deliver because of local knowledge.

• More accountability: to establish a  closer relationship between governments and the recipients of public services

• Easier manageability: local officials can make expenditure decisions

Agreement between the levels of government about who undertakes the different functions is essential, especially as the delivery of some public services will be shared between levels of government.  In addition, some further issues to consider will be:

• which level of government will formulate the policy?

• who is going to provide the financing?

• who is going to administer the program?

• does the government allocated a function have adequate capacity to implement it?

Revenue responsibility

Fiscal decentralisation is also about deciding which revenues, fees and charges should be assigned to the various levels of government. There are a range of considerations:

• Who determines whether the tax is to be imposed?

• Who determines the nature of the tax base?

• Who determines the tax rate actually applied to that base?

• Who collects the revenue and enforces the tax?

• Who receives the revenue in the end?

Other features of fiscal decentralisation

Intergovernmental financial grants and transfers

In most countries, the revenue powers of subnational governments will be less than the total cost of their expenditure responsibilities.  This is because the broadest economic taxes are most efficiently collected by the National Government.  Therefore, fiscal decentralisation inevitably involves the National Government transferring some of its revenues to subnational governments either as revenue or grants.  There are three forms that transfers can take:

• Tax transfers: the National government shares some of specified taxes with subnational governments on an agreed basis

• Unconditional grants: Funds are provided to subnational governments and they spend as they choose

• Conditional grants: The National Government provides funds only for specified purpose

Legal framework

The principles, aim and structure of fiscal decentralisation may be laid out clearly in the constitution, other laws and agreements between governments.  This will provide transparency, certainty and understanding between levels of government, especially about financing issues.