Fiscal disparities and intergovernmental transfers in Tanzania

PhD ceremony: Mr. L.J. Ishemoi, 14.45 uur, Academiegebouw, Broerstraat 5, Groningen

Title: Fiscal disparities and intergovernmental transfers in Tanzania

Promotor(s): prof. J. de Haan

Faculty: Economics and Business

Tanzania is a developing and decentralized country characterized by widespread fiscal disparities. Fiscal disparities arise when local governments are unable to produce similar services at similar tax rates. Fiscal disparities consist of two components: regional differences in fiscal capacity and in expenditure needs. Fiscal disparities result into inequity and inefficiency in the allocation of financial resources to local governments. A solution to the problem of fiscal disparities is to allocate resources based on accurate measures of both fiscal capacity and spending needs.

Public services in Tanzania are provided by local governments. These services are mainly financed by grants from the central government, own source revenue and loans. In Tanzania, service levels are low and local governments differ substantially in their ability to raise revenues as well as the need or demand for public services despite the fact that grants are formula-based since 2004. As a result, wealthier jurisdictions are better able to raise more tax revenues to finance public services than poor ones.

Ishemoi provides approaches on how local governments’ fiscal capacity and their spending needs can be measured in a country where data availability is low. Based on the developed approaches his thesis derives an equalization grant that considers variations in jurisdictions’ fiscal capacities and their spending needs. In addition, the thesis measures whether formula-based grants reduce political influence on the allocation of financial resources to local governments. The results reveal that the introduction of formula-based grants does not help to curb political influence on grant allocation.