commission on fiscal imbalance 合集

For a variety of reasons expenditure incurred and tax

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Unformatted text preview: rojects, such as infrastructure and education, are spread over time, which means that not only present residents of a locality, but also future residents will consume the services provided by the projects. Therefore, the benefit principle of taxation suggests that future residents should also contribute the cost of investment. For this purpose borrowing is an appropriate tool that offers a means through which payments for capital projects can be spread over the life of the project so as to coincide more closely with the stream of future benefits (Oates, 1972). 2. Economic Development: Delaying infrastructure investments might have a negative impact on subnational economic performance. Such a negative impact will have a direct effect on residents’ life in terms of less employment opportunities and decline of earning levels. Therefore, borrowing is an appropriate tool for subnational governments in investing on infrastructure projects to stimulate regional economy. 3. Synchronization of Expenditure and Revenue Flows: Access to financial tools offers an opportunity to subnational governments to synchronize expenditures incurred and revenue collection. For a variety of reasons expenditure incurred and tax intake may not be fully synchronized for a particular year. In such a situation, borrowing provides subnational governments to smooth out the mismatch and provide services without disruption. There are at least two different channels through which subnational governments can borrow: through a public intermediary such as infrastructure bank or direct borrowing from private capital markets. The international experience suggests that lending through a public entity, either central government lending or public financial intermediary, suffers from political favoritism (World Bank, 1990). Direct access to private markets entails development of market-based 169 Commission on Fiscal Imbalance relationship between lenders and subnational governments, which requires the use of private credit rating and bond insurance agencies to monitor subnational borrowing. Establishing these institutions offers a potential for improving transparency and political accountability in local government management. As capital markets emerge, residents of local governments would learn more about the financial health of their governments. Subnational borrowing is an important component of the devolution of fiscal powers to local authorities. However, a welldesigned regulatory framework for subnational borrowing is necessary to ensure that subnational borrowing does not provide perverse incentives to lending institutions and subnational governments for excessive lending and borrowing. Such a framework includes standardized accounting procedures for subnational governments, disclosure of subnational governments’ liabilities and repayment capacity (see Figure 16). However, these measures by themselves will not be sufficient to curb moral hazard problem. The macro concern of moral hazard occurs when subnational governments are backed by the central government by...
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This note was uploaded on 03/06/2013 for the course ECON 220 taught by Professor Paulo during the Spring '13 term at University of Liverpool.

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