Fiscal decentralization and
            intergovernmental relations in transition economics : toward
            a systematic framework of analysis
The decentralization of government in
            Eastern Europe represents a reaction both from below (to
            tight central political control) and from above (to
            privatize the economy and relieve the central
            government's fiscal stress). In all transitional
            economies, the developing structure of intergovernmental
            relations is intimately related to such critical policy
            issues as privatization, stabilization, and the social
            safety net. In the fiscal sphere, tax reform, deficit
            control, and intergovernmental finance are a tripod. Unless
            each leg is set up properly, the whole structure could
            collapse. The present strategy of devolving expenditures
            downward while holding back on revenue flows and transfers
            to balance the central budget is unlikely to succeed for
            more than a year or two at best. Net spending reductions at
            the subnational level may be difficult to achieve. From 10
            to 40 percent of outlays go to the subnational sector, and
            in many countries local governments provide much of the
            social safety that makes the pain of the economic transition
            politically tolerable. And, most housing and many
            enterprises have been shifted to local ownership, with the
            maintenance and subsidy cost this implies. Since the revenue
            sources assigned to local governments cannot finance
            expected levels of local activity, the result of shifting
            spending downward is likely to be strong demands for
            increased, rather than decreased, transfers. Alternatively,
            subnational government may look to coping mechanisms such as
            holding on to their enterprises (which provide vital social
            services), developing extrabudgetary revenues, or borrowing.
            These coping mechanisms threaten privatization, reduce
            budgetary transparency, and impede stabilization policies.
            The authors describe the risks to privatization, to
            macroeconomic stability, and to an adequate social safety
            net that present policies toward local government may imply.
            Its themes are that the subnational sector needs to be more
            realistically factored into national plans - and that
            subnational expenditures be more clearly assigned and
            revenue needs more realistically assessed. Such assessments
            are likely to acknowledge a larger sphere for subnational
            governments and the need for access to more robust revenue
            sources. Giving local government a share in the personal
            income tax is one possible and perhaps desirable approach to
            meeting these revenues needs. Careful attention needs to be
            paid to the design and implementation of the
            intergovernmental fiscal transfers likely to remain
            prominent features of the intergovernmental landscape for
            years to come. Caution is also needed on borrowing by
            subnational government. Consolidating and integrating
            extrabudgetary funds at the subnational (and national)
            levels is crucial to enhanced budgetary transparency and macrostability.