Under a federal structure, economic and revenue rights are shared between federal and other government units. Revenue rights are assigned on the basis of priority of central government and SNGs. Some times only revenue mobilized by SNGs by their own efforts may not be able to fulfill the needs of governments. Thus, SNGs are provided grant/ inter governmental fiscal transfer (IGFT) by federal government.
IGFT is a major component of fiscal federalism. For a strong, sustainable, and stable decentralization process, a sound and rational IGFT system is a prime requirement. The main objective of IGFT is to establish a fiscal balance between revenue and expenditure needs of local bodies and ensure vertical and horizontal equalization. IGFTs are used to make sure that revenues match the expenditure needs of various levels of to achieve national, regional, and local area objectives. It is concerned with preserving local autonomy and creating an enabling environment for responsive, equitable and accountable public governance. IGFTs depend and vary according to levels of government, responsibilities exercised by each, relative importance of transfers, financing, policy options of the national government and SNGs and level of fiscal gap among the governments.
Sometimes fiscal imbalances of local bodies occur because a larger part of revenue authority is retained by the central government. Also, in practice, public goods such as defense, foreign affairs, money and banking, national infrastructure, and, social insurance programs (i.e. pensions and social security allowances) are assigned to the central government; important public services, such as health, education and welfare, state public goods, such as roads and police protection are assigned to state or provincial governments. Local governments are assigned activities and services that include water and sanitation, local roads, and recreational facilities. Thus, the mechanism of IGFT is designed considering all these assignments and their extents to create a proper balance between revenue and expenditures.
Different levels of governments may have different capacity of providing services to their people and different revenue-raising capacities. To balance the resources between the governments, it needs an IGFT mechanism that transfers the resources to lower levels of governments on per capita basis with higher per capita transfers going to jurisdictions that have lower fiscal capacities. Globally, mainly two types of revenue sharing modes are in practice; upward and downward, depending on political and philosophical orientation, capacity of different level of governments, responsibilities to be performed by different level of governments. These sharing practices help to minimize vertical imbalances; transfers are guided by the constitution as well as statutes and regulations.
The Interim Constitution has initiated the process of fiscal federalism and the Local Self Governance Act (LSGA) 1999 has given the basic parameters for providing grants to locals; however it is not enough in the context of fiscal federalism and what Nepal is going to adopt in the forthcoming constitution.
Sources of grants, nature of public services to be provided and formula to be used to determine the grants are additional factors that influence the volume and size of transfers or grants; categorized as general and specific. General grant is used for administrative and operational purposes. Specific transfers are intended to provide incentives for governments to undertake specific programs/activities. Appropriate grants encourage local governments to participate in national priority and to accomplish the programs that serve joint interests at various levels of governments.
Equalization grant is a vital tool to meet the fiscal gap of the small and low revenue base government units. While providing grants, per capita income, average per capita expenditure of the national budget, revenue potentiality and revenue collecting efforts of governments are considered. The block grant is familiar in developing countries and is provided on ad hoc basis and sometimes on formula basis. Grants are also categorized as development, administrative and capital.
The sharing of revenue under IGFT is also used as a main tool to maintain balance between the governments units. Out of revenues, the amount of royalty collected on national and natural resources by the center may play an important role to meet the needs of SNGs with low a revenue base. In the process of federalization and decentralization, the balance between political, administrative and fiscal decentralization is a basic requirement. In this regard, functions are devolved on the basis of political decentralization and administrative capacity and the ‘finance should follow the function’ or expenditure assignments.
In the Nepali context, the Interim Constitution has initiated the process of fiscal federalism and the Local Self Governance Act (LSGA) 1999 has given the basic parameters for providing grants to locals; however it is not enough in the context of fiscal federalism and what Nepal is going to adopt in the forthcoming constitution. The well-known and commonly practiced criteria for providing grants to local governments are population, area, development index, revenue effort, development strategy adopted, expenditures, responsibilities assigned and other specialties. The grants are categorized as administrative grants, unconditional block grant, conditional block grant, and grant for special purpose, and reimbursement grant.
While designing the formula for distribution of grants, various variables and factors are considered such as population, geographical area, cost of the services/public goods, human development index, literacy rate, level of education and health services, availability of the infrastructure and revenue collection efficiency; they vary from country to country and weightages may differ as requirement and dominance of variables in socio-economic structures.
Though the constitution may not be able to address all these things, it should at least incorporate the major essence under the articles while others can be listed under its annex. Constitution makers should consider these factors to help ensure proper sharing of resources among the governments and levels of governments.
(Writer is working in the field of fiscal federalism as freelance practitioner.)
adhikaricm@hotmail.com
Related story
RSP Chief Whip Pariyar calls for equitable development and soci...
