Fiscal Federalism and Sub-national Budgeting

Mexico’s National Institute of Public Finance (INDETEC) in partnership with the Permanent Commission of Fiscal Authorities (Federal Finance Department) and the Latin American Institute for Economic and Social Planning Economic Commission for Latin America and the Caribbean (ILPES-CEPAL) held a workshop on fiscal and budgeting coordination on June 24-27, 2012. Held in Campeche, capital city of the State of Campeche, the objective of the workshop was to identify and examine common challenges in coordinating fiscal and budgetary processes between national and subnational governments.

International experts and public officials from Argentina, Brazil, Canada, Chile, Peru and the United States joined Mexican practitioners to discuss three themes: Economy and Public Finance, Public Budget and Evaluation, and Intergovernmental Coordination. The Forum of Federations was invited to make a presentation covering our work in Mexico, as well as more general thematic work on fiscal federalism, and also supported the organizers to secure the participation of Ronald Neumann, a Canadian expert practitioner on fiscal federalism with extensive comparative international experience.

The workshop discussions highlighted the key role that subnational governments play in creating conditions for growth and development of the regions, and the importance of coordinating subnational and national fiscal and budgetary policy, particularly in times of booms and financial crises or adverse situations.

The last decade has seen greater transparency in public administration in both national governments and subnational governments, often prompted by federal fiscal responsibility legislation, which is then replicated by sub-national legislatures. In some countries, however, there still remain challenges to fiscal responsibility at the sub-national level, and there is much work to be done to reach consensus among orders of governments in order to remain on the path of fiscal discipline. Another related theme was the policy of subnational government borrowing, which has very different characteristics. For example, Mexico, where states are sovereign in their debt policies, differs from Argentina, where the borrowing needs of the provinces are negotiated and approved by the federal Finance Ministry.

The workshop also focused on the need to adopt performance budgeting, to accompany the results-based management model that is widely used. Many experts and practitioners noted that a limited use of tools and technology by some sub-national governments can make it difficult to produce indicators to evaluate public programs and value for money. Also challenging to decision making and coordination is the lack of harmonized accounting systems within a country.

Finally, participants discussed the governance challenges created by the natural resources boom, particularly what is done with state revenues from the resource exploitation. In cases where resource revenues flow to the federal government, it will be important to ensure that there is some transfer mechanism of resource surpluses in order to maintain fiscal balance. For example, Mexico’s Petroleum Reserve Stability Fund is designed to divide unforeseen surpluses between the federal and sub-national governments, and has proven to be an important revenue stream for sub-national governments, particularly municipalities.

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