N5 – Module 4
The logical allocation of functions (role or duty) goes hand in hand with the rational or logical allocation of revenue sources. This means that there is an attempt to allow the authority who is most capable of providing services to also be responsible for generating income (revenue through tax). BUT it is often not so simple. After a democratic country or community has decided the measure of centralisation and decentralisation, it should also take into account the following: • Spill-Over Effects or Externalities (see Quasi-Collective services in Module 1, p.14); • Vertical Sharing (sharing of revenue between different levels of government) and Horizontal Sharing (sharing of revenue between same levels) and fiscal inequalities. See next page.
Local, National or Provincial? The question to ask is how should we choose the most suitable government level for rendering of a service and how should its financing be arranged? In the case of national defence this is easy – the central or national government fulfils this function, but what about libraries, water supply, education, etc. – should this be on a central, provincial or local level?
The ideal would be to allow each government to supply its own service within its own jurisdictional area, with its own revenue source which will allow it to pay for the service. The problem arises when a large city provides sophisticated services to its people, but finds that it lies geographically very close to a poorer or smaller community with little income. Once again we may speak of externalities or spill-over effects (see Module 1, p.14). When the fire department of a large city is called out to an area outside of its jurisdiction, it usually sends an account to the owner of the property which caught alight. Should this property be owned by a municipality the city itself will “bill” or charge that municipality. Some time in the future, that smaller municipality might be able to return some service to the large city and it will then “repay” its debt. No money changes hands but the amount is recorded on the respective budget votes of each authority.
And so we speak of vertical fiscal (taxing) equality and horizontal fiscal equality:
Vertical Fiscal Equality The ideal should be that all governments at all levels should have the ability to pay for the services demanded by their voters and citizens. Practically speaking, because local governments are usually the smaller of the three, they often suffer from an inequality. Unfortunately it is a fact also that the central government often has the means, the power and the administrative ability to collect taxes more effectively than a local authority. But the local authority, because it is closer to the people, often finds itself more able to spend revenue on services. Vertical revenue sharing which is more fully explained on the next page is an attempt to create a greater fiscal equality.
Horizontal Fiscal Equality
It seems that it is almost impossible to have absolute equality between governments at the same level – there will always be communities richer than others. Te aim should be to create a situation in which local authorities may provide comparable services to their community. A way to aid the establishment of horizontal fiscal equality is to restructure the geographical jurisdiction of governments thereby creating a more equitable tax base. Tere will always be some measure of fiscal inequality. Revenue Sharing (see next heading) is an attempt to lessen the effects of this inequality but not necessarily to eradicate it (do away with it) altogether.
One of the reasons many people are calling for a federal system in SA is that this matter of externalities will be much easier to define. Each region or province will be entirely responsible for all services except those which are clearly and logically the responsibility of the central government, such as national defence. In this way these believers in this system claim that fiscal inequalities will, at least, be lessened. See more on pp.66-67 for this debate.
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