1.1 Introduction
The role of local government has expanded in a large and increasing number of countries. This shifting of responsibilities is a product of a quiet, even silent, revolution over several decades during which countries have been re-examining and revising the roles of their governments. Shifting responsibilities and authority to local governmentâthat is, decentralizationâis a widely observed outcome and notably so in developing and transition countries where political decision-making is commonly highly centralized.
Much effort and many resources have gone into promoting economic growth and reducing poverty, the results and effectiveness of which are often questioned. Where citizens have little voice in determining local public services, expanding the role of local government through decentralization is recognized as offering potential for enhancing economic well-being and expanding faith in government. Realizing that potential, however, is challenging. There are many examples of successful decentralized countries, but decentralizing countries successfully is difficult. Part of the difficulty is that there is no one best model. Patterns of decentralization among successful countries are diverse and they have evolved in the context of history and culture. Efforts to decentralize must recognize the country context, but even in designing a basic structure, although the principles are straightforward, there are many possible pitfalls and diversions as well as, often significant, opposing interests. Hence, decentralization programs have had mixed results. The objective of the exercise is to enable people to be more engaged in their government and for local governments to do more for their people. Furthermore, success requires that governments represent local preferences; that is, they be responsive, transparent, accountable, equitable and honest. In effect, empowering local governments and empowering their citizens. Achieving these ends, however, is demanding.
This book is part of a two-volume set aimed at assisting those pursuing decentralization and specifically seeking expansion of the role of local governments and the empowerment of their citizens. The initial volume, Local Public Finance and Economics: An International Perspective, focused on principles and best practices for local government. The main topics there covered organization and responsibility assignment, service delivery, sources of own revenues, intergovernmental transfers and borrowing. This volume, Local Public, Fiscal and Financial Governance: An International Perspective, extends the previous analysis. The major topics are fiscal and financial management, pursuit of government integrity and accountability, and reform imperatives. Volume I was primarily concerned with local government design to achieve a quantity and quality of local public services matching local preferences and enhancing local well-being. Volume II encompasses a broader perspective as reflected by the term governance. Local governance is a more comprehensive concept defined as the formulation and execution of collective action at the local level to serve the public interest. It encompasses the direct and indirect roles of public and private institutions and organizations and the networks within and among them that structure local collective decision-making. As such, this approach draws additionally upon fields including public choice, new public management and the new institutional economics. In part due to the emphasis on governance, public administration and administrative issues receive considerable attention in this volume. The governance perspective is believed to provide a stronger foundation for analyzing the pressures that globalization and the information revolution place upon citizen-state relations at the local level and to enable better policies for local government to address both market and government failures.
1.2 Overview
This section provides both an overview and a summary of the topics in the book and summaries of the chapters. The chapter reviews are organized by book parts and in numerical order.
1.2.1 Part II: Local Public, Fiscal and Financial Management
Part II is an examination of a number of the more conventional topics of local public finance, but it extends the analysis by delving further into options and alternatives. The chapters in Part II cover tax and particularly property tax administration, budget and accounting methods, and fiscal discipline.
1.2.1.1 Chapter 2: âLocal Tax Administrationâ
The success of any local tax system depends critically upon its administration. A successful administration must treat taxpayers (and potential taxpayers) fairly, be efficient and keep corruption and evasion to a minimum. Issues to be addressed in striving for a successful local tax administration are examined in Chap. 2. A central question is who should be responsible for the administration of local taxes. Should it be central governments, the independent local governments, some blend of the two or, perhaps, an autonomous agency? Central administration affords advantages in scale and scope and separation from local taxpayers while local administration, for example, offers familiarity with local conditions, association with local government (use and need for funds), and diligence in collecting local taxes. Autonomous agencies can provide potentially advantageous independence from politicians and from the civil service. The typical arrangement is a mix of central and local administration with the senior government determining the local tax base (primarily a revenue assignment matter) and being responsible for establishing standards for local tax administrative staff and (perhaps with local government associations) staff training. Local governments should be responsible for setting local tax rates. Assignment of the administration of the collection, enforcement and auditing of the taxes depends upon the capacity of local government and the degree of autonomy that central government is prepared to grant. Improving local tax administration has many facets. Among those are identifying taxpayers, minimizing ambiguities and loopholes, coping with the informal economy, controlling corruption, improving compliance, enforcing collection, handling appeals and undertaking performance reviews. Local tax administration can be complex, but establishing an effective and fair system is critical.
1.2.1.2 Chapter 3: âThe Practice of Real Property Taxation in the Worldâ
Property taxes are widely used and are an important and growing source of own revenue for local governments. As such, Chap. 3 serves as a primer on property tax practices worldwide. Some of the major features are noted here. Across OECD (Organisation for Economic Co-operation and Development) countries, property taxes amount to 1.6% of GDP (gross domestic product) on average. In a sample of developing and transition countries, the average is only 0.005% of GDP but that amounts to 40% of local government taxes. Taxes on real propertyâthat is, land and improvementsâdominate property taxes and the immobility of such property makes it suitable for local taxation. Since expenditures in improvements are sensitive to taxation, property tax rates applied on improvements may be lower than those on land. Assessments for property taxes are typically on market value, especially in developed countries. But even there, although more so in developing and transition countries, an alternative tax is sometimes used, one that relies on readily identified characteristics such as area and/or use. Market values are most readily estimated where there is an active property market and property characteristics are well known, but where market transactions are unusual, value might be approximated from depreciated cost or discounted income. While assessments of capital value are most common, rental value is used in some places. It is customary that senior levels of government regulate assessment methods to ensure uniform practices, but it is ideal if the local authorities set their own tax rates so as to better match local taxes with local preferences. Different types of property (e.g., residential, commercial, industrial, agricultural) may be taxed at different rates. For example, residential rates are frequently lower than those on commercial and industrial properties. For political reasons, taxes from non-residential property usually subsidize residential servicesâa feature that can distort the property tax as a benefit tax within municipalities. Certain types of properties (e.g., religious and government buildings) are subject to special consideration. In addition, special arrangements may be made to promote economic development or renewal and/or to reduce property tax burdens on particular groups (especially low-income households). In addition to local general-purpose governments, property taxes often support a variety of services provided by special districts (e.g., school authorities with independent taxing powers). Because boundaries typically do not coincide, to ensure the same tax rates apply across overlapping jurisdictions and to provide proper information in the case of determining senior government aid to local authorities, senior governments may need to ensure that valuations relative to the assessment bases (e.g., market value) are uniform across local governments. As with other forms of taxation, a property tax system will be accepted only if it is considered fair which includes having a trusted complaint and appeal mechanism. Real property taxation is a valuable and important source of revenue for local government but one that seems underutilized especially in many developing and transition countries.
1.2.1.3 Chapter 4: âMunicipal Budgeting and Accountingâ
Budgets are an essential tool of municipal government. They are vital for financial planning and management, for contributing to accountability and transparency, and for avoiding corruption and misappropriation. The roles and methods of budgeting and accounting in municipal government are reviewed in Chap. 4. Two types of budgets are necessary, operating budgets (which focus on resources used up during the, typically annual, budget period) and capital budgets (which address infrastructure financing and outlays). Regardless of the type, budgets have historically been oriented toward financial controlâthat is, monitoring the inflow and scrutinizing the outflow of funds. More recently, budgets have come to embrace also an output focus and contribute increasingly to expenditure effectiveness through expanded use for management and planning. Because senior governments are (actually or implied) financially responsible for municipal governments, municipal budgets are commonly subject to senior government requirements. Typically, operating budgets must be balanced while borrowing is possible (within limits) for financing capital investments. Senior governments can assist municipal governments (as well as other local authorities and its own agencies) by pooling borrowing requirements, borrowing on their behalf and then on-lending to the individual units. This reduces transaction costs and often interest costsâespecially for smaller municipalities. In part, the recommendations of accounting organizations have led to a movement from accounting on a cash basis to accrual (or modified accrual) accounting. Fund accountingâthat is, accounting in separate funds for the finances associated with different municipal activities for compliance and/or management reasonsâis a common feature of municipal accounting. Regular and timely reporting is important for effective budgeting and accounting. Reporting includes annual independent audits. Reliable municipal budgets and accounts serve a range of services and interests. Notably, they are valuable internally for the use of policymakers and management, for external interests (e.g., citizens, lenders) and for senior government monitoring.
1.2.1.4 Chapter 5: âLocal Fiscal Disciplineâ
Fiscal discipline is most evident where there is a tradition of fiscal conservatism and well-developed and strong fiscal institutions. Even in such cases, avoiding fiscal indiscipline is likely to require clear and enforced fiscal rulesâespecially at the subnational level. Subnational, and particularly local government, is susceptible to fiscal lassitude due to weak citizen accountabilit...