This chapter explain why sub-national governments exist at all and compare the merits of fiscal decentralisation and centralisation; describe the Tiebout model; describe the assignment of expenditure functions and revenue sources (tax powers) to the national, provincial, and local spheres of government in South Africa; distinguish between tax competition and tax harmonisation.
• • • • Explain why sub-national governments exist at all and compare the merits of fiscal decentralisation and centralisation Describe the Tiebout model Describe the assignment of expenditure functions and revenue sources (tax powers) to the national, provincial, and local spheres of government in South Africa Distinguish between tax competition and tax harmonisation • • • • • Explain the reasons for, and the nature of, intergovernmental grants List the types of intergovernmental grants Explain the issues that surround borrowing powers and debt management at sub-national level Review the role of the South African Financial and Fiscal Commission (FFC) in sharing revenue across the three spheres of government Discuss trends and issues in provincial and local government financing in South Africa • • • • Sub-national government Intergovernmental fiscal relations or fiscal federalism Spatial externalities Public choice perspective on fiscal federalism Just as the consumer may be visualised as walking to a private market place to buy his goods, we place him in the position of walking to a community where the prices (taxes) of community services are set Both trips take the consumer to market !ere is no way in which the consumer can avoid revealing his preferences in a spatial economy Tiebout, 1956: 422 Assumptions • All citizens are fully mobile • Individuals have full information about the local public goods offered by each jurisdiction • there is a large number of jurisdictions to choose from, spanning the full range of public good combinations desired by • citizens • There are no geographic employment restrictions: people receive income from capital only and are not tied to a • particular location through job or family ties • There are no spillovers across jurisdictions • There are no economies of scale in the production of public goods • • Benefit or costs of a public service spill over to non residents Justification for centralised provision of public services – Transport systems – Water • Lower administration and compliance costs The assignment issue • Stabilisation function • Distribution function • Allocation function • Tax assignment • Expenditure assignment Tax competition occurs when sub-national governments adjust (lower) their tax rates to attract mobile factors of production (notably capital) from other jurisdictions Tax harmonisation occurs when sub-national governments coordinate their tax policies (for instance, by limiting the degree of variation in tax rates levied, or by defining the tax bases in a uniform way) • • Financial contagion Moral hazard • • • Fiscal imbalances Minimum standards in public goods and services provision Compensation for benefits • Constitutional – – • Expenditure assignment Revenue assignment and borrowing powers Intergovernmental transfers and the Financial & Fiscal Commission (FFC) – – – Revenue sharing Vertical division of revenue Horizontal division of revenue • • • Horizontal fiscal imbalances Provincial financing issues Local government financing issues – Urban economics ... in South Africa • • • • Sub-national government Intergovernmental fiscal relations or fiscal federalism Spatial externalities Public choice perspective on fiscal federalism Just as the consumer... economies of scale in the production of public goods • • Benefit or costs of a public service spill over to non residents Justification for centralised provision of public services – Transport systems...• • • • Explain why sub-national governments exist at all and compare the merits of fiscal decentralisation and centralisation Describe the Tiebout model