Why Focus on Spending Needs Factors? The Political Economy of Fiscal Transfer Reforms in Mexico
IMF Working Papers, October 1, 2007
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Bibliographic details
- Authors: Ehtisham Ahmad, Mercedes Garcia-Escribano, José Antonio González Anaya, Ernesto Revilla, Giorgio Brosio, Ben Lockwood
- Published: October 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868159.001
Main thesis and scope
- An equalization system ensures that subnational governments can provide similar level of public services at a comparable level of own tax-effort.
- The paper focuses on the importance of spending needs factors in the design of equalization transfers as well as special purpose transfers.
- Emphasis on the role that spending-needs–based transfers could have in setting the agenda for better accountability for recipient governments.
- Illustrates both design and implementation questions with examples from Mexico.
- Takes into account the difficult political economy constraints to reforming any system of transfers.
Key findings and analysis
- Spending needs factors are central to designing equalization transfers that allow comparable service provision at comparable own tax-effort.
- Special purpose transfers can be designed around spending needs factors to improve targeting and accountability.
- Implementation examples from Mexico highlight practical design choices and operational challenges.
- Political economy constraints can substantially limit the scope and pace of transfer reform; reforms must consider stakeholder incentives and feasibility.
Policy implications and recommendations
- Design equalization transfers to explicitly incorporate spending needs factors to promote equity in service provision.
- Use special purpose transfers informed by spending needs to enhance accountability of recipient subnational governments.
- Account for political economy constraints when sequencing and packaging reforms to increase feasibility and durability.
- Prioritize transparency and clear criteria in transfer formulas to improve legitimacy and reduce politicization.