1. Intergovernmental transfers and decentralized public spending
Prof. Dr. C.G.M. Sterks

2. Overview Grant definition Aim of the paper Short comment
Analysis statistical data / types of grants
Analysis of basic principles of grant design
Indicate how to deal with implementation problems
Short comment

3. Grant definition
Transfer from central government to a sub- national government

4. Statistical data / types of grants (1)
Empirical significance
increased dependence on grants
Unwillingness to increase sub-national tax base
Correction of horizontal imbalances
Financial incentives for sub-national spending
Types of grants
Useful overview Figure 3
Choices made
Great deal of variation

5. Basis principles of grant design
Objectives of grants
Financing grants as an alternative to enlarge sub-national tax base
Subsidization grants to compensate for spillover effects
Equalization grants to provide average package of services at same tax effort

6. Financing grants (1) Aims Distribution formulas
To enable sub-national jurisdictions to finance a basis package of services
To provide resources needed to supply programmes imposed by central government or to reach imposed minimum standards
Distribution formulas
Preferably simple formulas based on normative costs

7. Financing grants (2) Related issues
Need to collect performance information
Need to cope with volatility problems to increase predictability for planning purposes
Need to avoid pro-cyclical effects

8. Subsidizing grants Earmarked matching grants
Stimulation of local or regional cooperation

9. Equalization grants Equalization of tax capacity
To compensate for relatively small tax bases
Needs calculation of tax capacity
Full compensation to be avoided (incentive effects)
Equalization of service capacity
To compensate for relatively high costs
Needs calculation of service costs indicators
Equalization can be achieved via horizontal grants and via corrections upon financing grants

10. Implementation problems
Use insights from public choice theory, principal agent theory and economics of information
Constrain volatility by linking to trend estimates
Limit room for strategic behavior
Take institutional, historical and cultural circumstances into account

11. Short comment
Use of same grant for various purposes is seen as an important cause of inefficiency (see page 4)
No clear solution is presented for that problem
General purpose grants can at the same time be based on financing, equalization and subsidization purposes.