Decentralization, local government capacity and creditworthiness : macroeconomic aspects

Abstract

In many transition economies of Europe and Central Asia, responsibility for the provision and financing of services is being decentralized. Yet, the national policy dimensions of decentralization can have a crucial impact on local governments' spending decisions and on their ability to mobilize resources. Moreover, the expanded local government role in delivering services remains constrained by weak institutional capacity and limited financial resources and know-how. Within the increasingly decentralized environment, this strategy note reviews the broad range of issues/parameters relevant to building a sound local government finance framework and enhancing creditworthiness and access to private capital/credit markets in a way consistent with macroeconomic stability and policy objectives. This note covers the macroeconomic and public finance aspects of a sound decentralization strategy with improved intergovernmental fiscal relations and strengthened capacity for stable own-source revenue generation by local governments. It covers more specifically issues of expenditure and revenue assignment, intergovernmental transfers, stability of municipal budgets, municipal deficits and indebtedness and some macroeconomic indicators of municipal creditworthiness.