ABSTRACT
The fiscal dimension of decentralization covers the assignment of public spending responsibilities to subnational governments (SNGs), and how these are financed through local taxes, transfers, and borrowing. Revenues from local tax powers are inadequate and the scope for borrowing is limited for most SNGs outside wealthy urban areas. Consequently, the main source of financing for the local spending responsibilities of most SNGs is, and will remain, fiscal transfers (i.e., revenue-sharing and unconditional and conditional grant mechanisms). These show a wide variety of types and features around Asia. The challenge is to design such mechanisms in ways that promote equity in public spending across the national territory, and impart the right degree of local flexibility and the right incentives for SNGs.
