In general, sub-central governments are responsible for delivering services to the population. Their ability to collect revenues depends on the degree of fiscal federalism. In countries where sub-central levels have limited ability to collect taxes, their main source of revenues are central government transfers, which are mostly earmarked in the central budget.
Recent research has found that decentralising spending and revenue collection to the same extent contributes to economic growth and spending efficiency, especially in economies that are highly integrated to global markets (Kim and Dougherty, 2018). LAC countries, however, have traditionally suffered from an imbalance between resource-generation and spending at sub-central levels of government, rendering local and state levels dependent on transfers from the central government (Cibils and Ter-Minassian, 2015). As a result, these have limited autonomy in their public finances.
Among LAC countries with available data in 2017, the central level generated 69.7% of the revenues, the state level contributed 19.1% and the local government 10.4%. This shows a higher decentralisation than in 2007, when the central level collected 70.7% of the revenues, the state 21.2% and the local level 7.5%. Similarly, in OECD countries, the state level collected 19.2% of the revenues and the local level contributed 10.2% in 2017.
There are differences in decentralisation of revenue collection among LAC countries. In Chile, in 2017, the central government collected 91.9%, and the local government only 8.1%. Regional governments in Chile are “mixed entities” (both decentralised and deconcentrated) and the only self-governed entities are municipalities (which manage the communes). However, these are highly dependent on transfers. Hence, they serve mainly as public service providers (OECD, 2017). On the contrary, in Brazil, a federal country, the central government contributed 65.5%, the state level 24.0% and the local 10.4%.
In LAC, spending is more decentralised than revenue collection. In 2017, local levels spent, on average, 18% of total expenditures. By contrast, the central level spent 62.7% and the state level 18.5%. The imbalance is more apparent in Mexico, where the central government spent 38.6% and the state level 35.0%, although the former collected 80.5% of the revenues and the latter only 7.2%.
Similarly, in Peru, the central government collected 82.6% of the revenues, and spent 53.3% of the total expenditures. The state level collected 0.7% of the revenues and spent 19.1%, and the local level raised 4.5% and spent 15.9%. Such an imbalance is due to the dependence on extractive industries (whose revenues are shared), the lack of sources of revenue at the regional level (e.g. specific taxes) and the lack of autonomy in defining municipal taxes (Cibils and Ter-Minassian, 2015).
