EXECUTIVE SUMMARY
and three times more than in Sub-Saharan Africa. In the late 2000s, local governments spent around USD 3000 – 4000 per person annually in the USA and in Europe,50 but just USD 36 in Africa.51 But ranges from EUR 15,872 in Denmark to EUR 97 in Malta (see Europe chapter). 50
See GOLD II. In Eurasia the average annual budget expenditure/person of local governments is around USD 232; in Latin America USD 133; in low- and middle-income countries in Asia USD 92. 51
On average developing countries raise 0.5% of GDP from property tax compared to 2% in developed countries. Property tax is almost absent in many countries (in Asia and Middle East but also in Africa, Eurasia and Latin America). It is difficult and expensive to administer, all the more so in countries without well-defined property registers, with sizable informal areas, and with weaker local capacity for value assessments, enforcement, and collection. See GOLD II. 52
Mathur (2012). This trend of transfers is also stressed by the OECD [Claire Charbit (2011)]. In Europe, local taxes and fees increased at a similar rate as grants in the last decade (except during 2009-2010), and represent around 54.7% of local budgets Grants and subsidies fell in Europe from 2010 to 2012 (-5.5%), while own revenues increased (see CEMR-Dexia, summer 2012). In Latin America, local governments raised about 40% from own taxes and fees (average for 15 countries), with wide variation. In Africa an average of 40% of local budgets come from local taxes and fees and 60% from transfers (sample of 15 countries), with wide variations between countries. 53
Zhang (2011); cited in Mathur (2012) p. 32. 54
The increasing gap between expenditures and revenues is largely due to the limited powers and capacity of local governments to mobilise local resources, one of the main elements of decentralization. Traditionally, local government has been financed from three main sources: 1) local taxes and tariffs for services (‘own revenues’), 2) transfers from higher levels of government, and 3) borrowing. Many local governments, however, have a limited capacity to mobilise their ‘own’ local resources and little control over transfers. Generally speaking, local governments lack the buoyant tax sources that would produce revenue growth in line with their increasing responsibilities. The potential of property tax, the most commonly recommended and globally used local government tax, remains unrealized.52 Political barriers include both limitations imposed by higher levels of government and reluctance on the part of local government to raise taxes. The other main source of ‘own revenues’ is tariffs for services. In Canada and the USA, local governments generate a quarter of their own revenues through fees, in the EU27, 10.6% in 2011. The situation is very different in many middle and low income-countries where tariffs make a limited contribution to local budgets, partly due to affordability problems and partly to weak local collection capacities. Transfers from central government are second source of revenues. According to a UN Habitat study, they account for 47% of local government revenues in developing countries and around 36% in developed countries, a percentage that rose in the 2000s, (as the share of local taxes in local budgets de-
creased).53 Far from being an ‘easy’ solution to better service provision, the use of transfers poses a number of challenges, including unpredictability and lack of transparency (as in West and Central Africa); or vulnerability to cuts with poor consultation (e.g. in Eurasia). An excessive reliance on conditional grants can also overly constrain local government autonomy and shift their focus from local to national priorities. Most importantly, substantial revenue-sharing can create perverse incentives for local revenue generation, undermining local resource mobilization and local government accountability. Resources can also be distributed very unevenly, concentrated in main cities and central regions. Large cities, with their larger fiscal bases and greater capacity to mobilize resources, tend to have less difficulty in financing services, but it is in intermediary cities where the most significant growth is expected and the greatest investment is needed. Many countries lack effective equalization grants, critical to improving access to basic services in the least wellserved regions and towns. In Africa, just a few countries (including Morocco and South Africa) have introduced such mechanisms, and in the Middle East and West Asia there are none. The situation is a little better in Latin America. Some Asian countries use equalization transfers (e.g. Australia, Indonesia, and Japan), but others virtually ignore fiscal disparities. The financial gap between responsibility and the devolution of adequate revenues has resulted in increasing pressures on local government. Global trends towards decentralization have, in fact, often been accompanied by the centralization of revenues.54 After two decades of gradual decentralization, local governments across the world face increasing problems in generating the revenues to meet the recurring costs of service provision. Problems are being handed to local governments, but not the means