Fiscal Decentralisation Theory

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A lot has been written to describe fiscal decentralisation theory in this chapter. The study considered this particular section important in the sense that theory is developed from observations of phenomena in question. World Bank (2003:3) identifies four main practical issues that concern fiscally decentralised systems. The assignment of responsibility for the provision of services across different tiers of government, the assignment of revenue-raising powers, intergovernmental fiscal transfers and lastly the sub-natural borrowing. The assignment of responsibility for service provision option argues that every multi-tiered fiscal system has responsibility for the provision of a particular type of service. This service is usually assigned across…show more content…
It has been observed that this usually results in some level of mismatch between spending responsibilities and revenue-raising powers for local (sub-national) government. This challenge has resulted in the need for some form of fiscal transfer from one level to the other level of government; usually from the central to local (sub-national) government is needed to correct this abnormality. This challenge, is often referred, to as vertical fiscal imbalance. Vertical fiscal imbalance; which is defined as a mismatch between the revenue-raising powers and expenditure responsibilities of each level of government; where a shortfall in revenue for one level of government (typically the regional level) is made up by grants funded from the surplus revenue of the other (typically the central government) This form of transfer has been named intergovernmental fiscal transfers. Fiscal transfers to correct vertical fiscal imbalance, also face design challenge. Related to the fundamental question of vertical fiscal imbalance is the issue of, how fiscal transfers should be designed? In this regard, the first-order issue concerns the share of general purpose (for unconditional or untied) transfers related to specific purpose (or conditional or tied) financial…show more content…
Furthermore, it was argued that in the absence of significant intervention from the national government, financial markets send a clear signal of local governments’ performances by providing borrowings or block them from accessing the financial market. The first generation theory also suggests that local government should be given the space to manage and service their own debt, but in conjunction with transparent accounting arrangements for public sector finances (Vo,
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