How do we explain puzzling variations in levels of development between districts in a single country? Do sources of revenue affect government expenditure? Building on fiscal theories of governance, this paper from the University of California, San Diego, uses Tanzania and Zambia as case studies. The entire local government budget is studied, giving a more comprehensive picture than sectoral studies.
The fiscal link between the government and the governed is a source of political accountability which is independent of political institutions. Arguably, a government has an incentive to defer to its citizens’ preferences when it is dependent on them for revenue. Taxpayers may benefit in proportion with the share they finance. Rentier economics asserts that external funds, such as oil revenues, impede the development of democracy by reducing the dependence of the government on the governed. Some scholars have extended this to cover foreign aid.
It appears that the effects of decentralisation are contingent upon local factors even when institutions are held constant. The following clear findings emerge:
- Local taxes per capita have a strong negative effect on the share of local government expenditure financing recurrent costs. As taxes rise, proportional spending on public services rises.
- Government transfers per capita have a strong positive impact on the share of local government expenditure financing recurrent costs. As transfers rise, proportional expenditure on public services falls.
- Tanzania, donor flows have no systematic effect on government expenditure. In Zambia, transfers from the donor fund ZAMSIF have the expected negative effect on local government provision of services, perhaps because they are more predictable.
- In Tanzania, government transfers of funds to districts are quite predictable and transparent, based mainly on population size. Donor funds follow no such logic. The largest problem for district governments with multi-year budgeting is inability to forecast donor flows.
- Local governments invest in projects that are quick to complete and can be targeted narrowly. This may be because the time between elections means such projects are more politically useful to councillors.
- A comparison of two districts in Tanzania shows that public services provided by central government have a higher bias towards long-term projects with a higher social return (education, health, infrastructure).
The results suggest that fiscal accountability is an important factor to consider when designing policies to enhance local government capacity.
- External funds encourage district governments to use locally-generated funds for recurrent expenditures (rather than public services). If donor flows are predictable, they have this effect, just like central government funds.
- Independent of local external assistance, as the amount of taxes from constituents rises, local governments devote a larger share of the revenue to public services.
- On the one hand, local governments are sensitive to the needs of their constituents. On the other hand, the services they provide may have a lower social return than those provided by central government.
- Thus there may be a trade-off in aid-dependent countries between fiscal autonomy, which may make governments more accountable, and centralisation. Under the latter, the government (most likely under pressure from donors) supplies public services that have a greater social return.
