CHAPTER SIX
Urban Local Governments
and Finance
Chapter Objectives
After studying this chapter the students will be
able to:
Understand roles of central government in
the urban economy
Understand the roles of urban governments
in discharging urban responsibilities.
Trace out the source & types revenues for
municipality
Discuss expenditures incurred by urban
government
Understand the systems of controlling and
forecasting the expenditures.
Discuss strategies to be adopted by urban
Government Roles in the Provision
of Urban Services
This section describes the different roles
each level of government can take in
providing services to urban communities.
The relative strength of these roles at each
level of government varies from country to
country depending, among other factors, upon
the legal framework, the political-
administrative structure, or the economic
strength of each government level.
Government Roles in the Provision
of Urban Services (cont..)
Central Government
Among the several roles the central government
can play in the provision of urban services:
1.Assignment of responsibilities- Central
government has essentially four choices in assigning
responsibilities for urban services provision:
To entrust them in whole or in part to local
governments including organizations under the
latter's control;
To establish national corporations for specific
functions;
To assign them to its own ministries or
departments;
To leave some to the private sector;
Government Roles in the Provision
of Urban Services (cont..)
2.Grants and subsidies- Local governments
in most countries are heavily dependent on
central government financial transfers.
3. Loan finance- Borrowing is an obvious and
appropriate way of raising capital finance for
investment in such projects as housing, water,
public transportation, and many others which
generate a direct financial return.
4. Other roles- The central government plays
other important roles in relation to urban
governments through:
Government Roles in the Provision
of Urban Services (cont..)
The setting of national development
strategies in periodic plans;
The designation of the local tax structures
and the scope for the levying of charges;
Regulations governing the annual budgeting
and financial and audit procedures;
Guidance on organizational and staffing
structures and on levels of remuneration; and
The provision of training and technical
assistance.
Government Roles in the Provision
of Urban Services (cont..)
Local Government
Local governments in most developing
countries have been assigned a range of
functions related to the provision of local public
goods and services.
Local governments normally are allocated
responsibility for detailed urban planning and
urban development control.
They are responsible for controlling both land
development and land uses, as well as providing
basic urban infrastructure services such as
water supply, roads, sewerage and drainage
systems, and parks and recreational facilities.
Government Roles in the Provision
of Urban Services (cont..)
The Role of Local Governments is to:
Undertake, efficiently and effectively,
functions allocated to it by the central
government;
Provide services in response to the needs of
residents;
Mobilize resources from its own residents to
undertake these functions;
Plan, program, and budget efficient
provision of urban public services to meet the
needs of its residents;
Coordinate with other levels of government
Government Roles in the Provision
of Urban Services (cont..)
Plan, control, and monitor the use of land
and environmental assets; and
Make effective use of intergovernmental
grants and loans.
Income and Expenditure of Local
Governments
Municipal Revenues
Local municipal governments have two
primary sources of revenue:
The first are revenues(i.e. internal) that they
collect themselves including local taxes, service
charges, fees and licenses, rental income from
buildings and facilities, interest income on
municipal investments, as well as income from
sales of municipal assets.
The other major sources of revenues include
central government transfers, grants, aid
donation and borrowing, and other external
sources.
Municipal Revenues
1. User Charges
In order to raise financial resources to
provide infrastructure and services, the public
sector typically charges the user for the
services rendered like Water supply,
sewerage, parking, etc.
2. Local (own-source) Taxes
In general, central governments set taxation
rules and generally take the best-yielding
taxes for their own use
There are three basic forms of local
taxation: i) property tax; ii) local income tax;
and, iii) taxes on expenditures.
Municipal Revenues (Cont..)
Property Tax
Property taxes include a variety of taxes on
land, buildings and other immovable property.
Taxes on land and buildings are the most
common form of direct revenue for local
municipal governments.
The advantages of property tax vis-à-vis
other tax alternatives are:
In most countries, property taxation has
existed for a long time and therefore requires
less justification when implemented;
The base of the tax, i.e. the property, is
immovable and can, therefore provide the
Municipal Revenues (Cont..)
Income Tax
The principal alternative to property taxes
found in many countries is some form of
income tax.
The local income tax is generally levied as a
supplement to national income taxes.
Income taxes are charges levied by a local
jurisdiction against the income or wealth of a
person or corporation.
Municipal Revenues (Cont..)
Other Local Own-Source Revenues
This category of local government revenues
comprises a broad list of local sales taxes,
payments, entertainment taxes, licenses and
permits, and vehicle taxes.
These taxes are generally described as
indirect taxes because they are usually
passed on by the payer to the end user.
Indirect taxes can be described as follows:
Licenses and Permits - include revenues
derived from the issuance of local licenses and
permits such as building permits, motor
vehicle licenses, and other permit fees.
Municipal Revenues (Cont..)
Charges for Services - include the receipt of
revenues stemming from such sources, such as
zoning fees, legal aid fees, etc.
Fines and Forfeitures - include revenues
received from fines and penalties imposed for
the commission of statutory offenses,
violations, and for neglect of official duties.
Miscellaneous Revenues - includes all
revenue not categorized in any of the above
revenue categories. Interest income, receipt
from the sale of surplus equipment, rental
income from public property
Municipal Revenues (Cont..)
3. Intergovernmental Transfers
Transfers from central to local governments
undoubtedly constitute an important feature
of local government finance.
Intergovernmental revenues account for all
revenues received from federal, state, or other
local government sources in such forms as
grants or shared revenues.
There are a wide variety of structures for
intergovernmental transfers.
Municipal Revenues (Cont..)
Rationale for direct central
government fiscal support
Central governments provide direct financial
support to local governments in order to
achieve a variety of national objectives:
Redistribution of Resources and
Regional Equity. Transfers can be used to
redistribute resources to disadvantaged
regions or to specific local government areas
to achieve a greater degree of fiscal
equalization among municipalities.
Municipal Revenues (Cont..)
Controlling Specific Local Government
Functions. Transfers may be used to promote
increased spending on particular functions or
types of projects in selected localities. The
rationale for using transfers to control local
government actions has several aspects
Macroeconomic Management. Central
governments may use transfers as a means of
controlling the overall level of expenditure by
local government as part of its macroeconomic
policy management.
Resource Mobilization Efficiency. Central
governments have developed tax transfer
systems to achieve greater efficiency in resource
Municipal Revenues (Cont..)
National Decentralization Objectives. Central
governments may use transfers to pursue national
decentralization objectives
Types of central government financial
support/transfers
Capital Investment. Central governments often
invest in physical facilities that become part of the
capital stock of local governments
Tax Credit- Tax credits (sometimes called ‘tax
expenditures’) are not direct transfers of funds or
facilities but are credits that the central government
allows to taxpayers for either contributions to, or
loans to, local government. The major uses of tax
credits are found in (1) the deductibility of local taxes
from national taxation, and (2) the exclusion from
Municipal Revenues (Cont..)
Shared Taxes- Shared taxes are taxes that are
collected by the central government and then
partially, or wholly, refunded to the jurisdiction
from which they were collected.
Grants- Grants are direct fund transfers which
differ from shared taxes only in the fact that the
amount allocated to a local authority is not based
on the amount of a specific tax that is collected in
that authority's jurisdiction.
Loans- Loans are the fifth major category of
transfers. Central government involvements in
loan activities for local governments usually take
the form of three alternatives: Loan guarantees,
Loans or grants to lending institutions which lend
Municipal Revenues (Cont..)
Loan guarantees are used to secure loans
from commercial lenders to local governments
with the central government assuming the risk
of default.
Local government lending institutions
are normally established on a self-financing
basis, but the central government normally
invests some equity capital in the operation.
Direct provision of loans from the central
treasury. This is normally the case where the
commercial banking sector is not sufficiently
developed to make such loans
Public Expenditures
Expenditure data for municipalities are
categorized under general fund (for general
expenditures of the local government) and several
other special funds. The major categories of
expenditures that one is likely to encounter
include:
Administration
Health/sanitation
Water/sewerage
Roads/bridges
Housing
Education
Parks/recreation,
Markets/sales houses
Public Expenditures
Major Responsibilities of Local
Governments in Public Expenditure:
A) Expenditure Control: Municipalities
should closely monitor and control budget
expenditures to minimize the potential of
expenditure overruns (revenue shortfalls).
B) Expenditure Forecasting: In forecasting
local municipal government operating
budgets, realistic questions concern what can
go wrong and what has been done within the
budget framework to prevent anything from
going wrong.
Strategies To Cope Up
Urban Fiscal Stress
Urban public authorities in developing countries
have come under increasing financial pressures.
They now face a rapidly growing demand for
urban services as a result of continuing rapid
urban population growth; however, their capacity
to supply urban services as well as to undertake
the necessary infrastructure development, is
severely constrained by a shortage of fiscal
resources.
In this environment, urban government agencies
can respond to fiscal stress by employing three
broad strategies
Strategies To Cope Up
Urban Fiscal Stress (Cont..)
First, they can seek to raise additional
revenue through a variety of means such as
increasing their user fees and charges, raising
local taxes, introducing new taxes and
charges, and selling off assets such as unused
land.
Second, they can seek to improve the
efficiency and effectiveness of their operations
through productivity improvement programs;
more efficient programming, planning, and
budgeting; cutting back some programs; using
low-cost approaches; or achieving cost savings
through the use of private contractors.
Strategies To Cope Up
Urban Fiscal Stress (Cont..)
Third, they can reduce the scope of their
activities by greater use of private
participation in the provision of urban services
under self-help activity systems and through
mobilization of nongovernmental resources.
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