FISCAL DISPARITIES ACROSS REGIONS*

By Pedro Herrera Catalán

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The optimal design of an intergovernmental transfer system involves facilitating the decentralisation of public service provision to lower jurisdictions, while simultaneously warranting that the local service provision and its financing not infringe national efficiency and equity goals. A central component of this fiscal system is its role in equalising the capability of lower level jurisdictions to provide citizens with similar levels of local public services. Thus, a deficient design of the equalization transfer component can potentially cause spatial inefficiencies and inequalities within a country.

In Peru, lower jurisdictions are responsible for financing part or all of the cost of local services from their own sources, relaying on transfers from the central government to meet any fiscal deficit. Nevertheless, equalization transfer component of the Peruvian transfer system totally lacks equity criteria, causing an inefficient provision of local public goods, with a low level of service quality. Both inefficiencies and inequalities are deepened due to the allocation of transfers that come from resources generated by extractive activities (mining, oil and gas), which allocates resources only to regions that have these natural endowments. Consequently, some regions receive more transfers that they really need.

In this study the Peruvian system of intergovernmental fiscal relations was redesigned considering horizontal equity criteria in the resource allocation process. In doing so, we use the methodology proposed by Ahmad et. al. (2004) so as to equalize intergovernmental transfers in Peru on the basis of local revenue capacity and expenditure needs. This redesigned fiscal system would allow a better redistribution of resources among regions and municipalities in Peru, and also would contribute toward attainment of a minimum standard of local public services in each Peruvian jurisdiction.

The results can be summarized as follows:

(i) municipalities located in mining regions receive more resources (US$ 455 millions in excess) than they should receive according to their revenue capacities and expenditure needs;
(ii) economic resources that municipalities located in mining regions receive in excess are redistributed among non-mining municipalities when a full reform of the intergovernmental transfer system is implemented, and
(iii) additional resources are not needed to equalise the intergovernmental transfer system, it only requires political

Finally, the study sets out four policy guidelines for implementing a reform of the intergovernmental transfer system in Peru.

* Paper awarded 1st Place by Economic Commission for Latin America and the Caribbean - ECLAC, Research Grant Competition. XX Regional Seminar of Fiscal Policy. Santiago de Chile, Chile.