Principles of Fiscal Decentralization

Unit 5: Subnational Deficits, Borrowing and Debt
 
The final pillar of intergovernmental fiscal relations is a logical corollary to the first three pillars. A local or regional government’s fiscal balance can be defined as the difference between its expenditure responsibilities on one hand and its own source revenues and resources from transfers on the other hand. If for any subnational government its expenditure needs are not properly balanced with the resources available to it, this could result in subnational deficits and the incurrence of debt.

Allowing subnational governments direct access to capital markets is an important complement to the devolution of fiscal powers to subnational authorities. If properly designed, decentralization of borrowing powers can add to the gains in efficiency and governance expected from fiscal decentralization. This unit reviews a range of issues related to subnational deficits, including macroeconomic concerns of subnational borrowing, imposing controls and limits on subnational borrowing, and assuring subnational government access to credit markets.

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