The impact of intergovernmental transfers on local revenue generation in Sub-Saharan Africa: Evidence from Tanzania

TLDR

Existing public‑finance literature suggests intergovernmental grants crowd out local revenues, but most studies focus on high‑income countries with robust fiscal systems. This study investigates whether intergovernmental transfers reduce or enhance local revenue collection in sub‑Saharan Africa, particularly in rural districts where local tax administration is weak. The authors analyze newly available quarterly fiscal data from Tanzania to assess the impact of intergovernmental grants on local revenue mobilization. The analysis shows that intergovernmental grants improve local revenue mobilization, with a stronger positive effect observed in rural districts.

Abstract

Do intergovernmental transfers reduce revenues collected by local government authorities (LGAs)? There is already a well-established body of literature in public finance, which argues that intergovernmental grants "crowd out" local revenues. Most existing studies, however, explore the fiscal implications of intergovernmental transfers in high-income countries where sound fiscal systems are taken for granted. In this paper, I explore the impact of intergovernmental transfers on local revenues in sub-Saharan Africa, a region where local fiscal capacity is limited and endogenously determined by financial support from international donors and the central government. I argue that in places where the existing capacity of LGAs to administer tax collection is weak and political costs of enforcing taxation are low—which are perennial features of many rural districts in Africa—intergovernmental transfers facilitate local revenue generation instead of undermining it. Analyzing newly available quarterly fiscal data on local revenues in Tanzania, I show that intergovernmental grants improve the mobilization of local revenues, and also that the positive effect of fiscal transfers on local revenue collection seems to be more pronounced in rural districts.