Chile remains one of the more centralized unitary countries within the OECD and also among emerging markets. Regional governments have traditionally been deconcentrated arms of the central government, with virtually non-existent own revenues. Municipalities have also a more limited range of responsibilities than is typical internationally.
Successive governments of different political colors have been reluctant to decentralize spending and especially revenue responsibilities, because of concerns about a lack of subnational capacities and fears that subnational financial autonomy could undermine the country’s established record of fiscal responsibility.
However, pressures for political decentralization (especially at the Chilean regional level) have been mounting, and legislation has been passed to allow the popular election of regional governments.
In light of this situation, we recently published a report at the IDB, titled Estrategia integral para una descentralización efectiva y fiscalmente responsible: evidencia de Chile, recommending some options for a gradual and fiscally responsible decentralization in Chile.
The report argues that this is likely to put pressure for fiscal decentralization as well, and that therefore it would be opportune to design and begin to implement soon a strategy for a gradual devolution of additional spending and revenue responsibilities that safeguards both fiscal discipline and the efficient provision of public services to the population, and promotes a more regionally balanced economic development.
Responsible fiscal decentralization
The main recommendations of the report can be briefly summarized as follows:
- The devolution of spending responsibilities should be gradual and reflect the evolving administrative capacities of different types of regions and municipalities. The central government should actively promote the development of such capacities across the national territory. Clarity about the allocation of spending responsibilities among the different levels of government at each point in time is essential for political accountability and fiscal discipline.
- As well demonstrated by international experience, a degree of revenue autonomy is very important for subnational fiscal discipline. The report argues for allowing regional governments to levy a surcharge on the personal income tax and explores other potential future tax handles for them. It also makes suggestions for strengthening own revenues of the local governments.
- The vertical distribution of intergovernmental transfers will need to change over time, to reflect the changing extent of devolution of both spending and revenue responsibilities. The mix of current transfers to the regional governments as between conditional and unconditional ones may also evolve over time, but should include from the outset a component of well-designed equalization grants. The report makes suggestions in this respect, drawing on successful international experiences with this type of grants. It also discusses the current system of transfers to local governments and proposes some options for improvement.
- Capital transfers are potentially an important instrument to promote a more balanced territorial development. The report argues that that the current system (in particular the design of the Fondo Nacional de Desarrollo Regional (FNDR)) has contributed to the excessive concentration of economic activity in the Santiago area, with adverse consequences for interregional equity and environmental sustainability. The report discusses options for reform in this area.
- As subnational governments take on greater responsibilities for investment in regional and local infrastructures, pressures will rise to allow them access to borrowing. The report argues that such borrowing should only permitted when they have acquired adequate revenue autonomy, and financial management capacity; and it should be subject to clearly specified and firmly enforced rules, based on indicators of their capacity to service the debt.