Intergovernmental Fiscal Relations: Questions of Accountability and Autonomy - Governing the Nexus: Water, Soil and Waste Resources Considering Global Change - page 64

coordination. Centralization may also be justi ed under the argument that the equity

pattern should be national, and not local, in order to avoid inequality among citizens
living in different geographic areas. Because capital is even more mobile than
individuals are, the setting of capital taxes by subnational governments also requires
coordination. Otherwise, they may engage in an inef

cient race to the bottom,
offering lower taxes to attract capital. Furthermore, they may choose to tax less
mobile resources, namely workers, which induces additional concerns.

4 Intergovernmental Fiscal Transfers

Sustainable local finance is essential for subnational governments to undertake the

responsibilities assigned to them by upper tiers of government, and contribute to the
well-being of the population. Because subnational governments ' own revenues are

frequently insuf finance their activities, revenue sharing between tiers of

government is necessary. Intergovernmental

cient to

fiscal transfers 6 may also be justi ed

by the need to reduce fiscal imbalances among jurisdictions of the same level of

government, and to stimulate subnational governments that engage in activities
generating positive externalities to neighbouring communities. Usually, the central
government is responsible for collecting the main national taxes and transfers a
substantial part of revenues to subnational governments. A well-designed system of
intergovernmental fiscal transfers is, therefore, crucial to ensure a good subnational

government s performance. In developing and transition countries, the weight of

intergovernmental

'

fiscal transfers on subnational government ' is total expenditures is

about 60 %, while in OECD countries it is about 30 %.
Intergovernmental transfers can be unconditional or conditional. Unconditional
transfers allow the recipient government to decide on how to spend the resources.
They are mainly used to correct vertical and horizontal imbalances among gov-
ernments. Vertical imbalances occur when subnational governments lack funds to
undertake the functions assigned to them. Equalization transfers can be used to
reduce horizontal disparities in wealth across jurisdictions. Conditional transfers
impose input-based or output-based restrictions on the recipient government. With
input-based restrictions, the donor government forces the recipient government to
spend the transfers on speci c expenditure items. Under output-based restrictions,

transfers are conditional on the achievement of certain results in service delivery.
This latter type of transfer induces higher responsibility in local management by
making the recipient government accountable for results. Conditional transfers
often require the recipient government to supplement the funding provided from the
upper level of government with their own outlays. These are called matching
transfers. When the granting government speci

es the maximum amount it is

willing to contribute, we have a matching closed-ended transfer.

6 On this topic, see Boadway and Shah ( 2007 ) and Geys and Konrad ( 2010 ).