Preliminary communication

Fly-Paper Effect in Slovenian Municipal Finances

Primož Pevicn ; Faculty of Administration, University of Ljubljana, Slovenia

Abstract

Decentralization is a contemporary concept of administrative reform, which in practice denotes a process of transferring resources and administrative powers to the lower levels of government, with the anticipated effect of the increase in efficiency of the provision of goods and services. However, it should be acknowledged that issues related to the appropriate creation of local jurisdictions and their financing system are also very important in achieving efficiency gains related to decentralisation. Namely, decentralization also has potential negative effects, one of them being associated with inappropriate financing system causing fly-paper effect. Local authorities’ own-source revenues may not be sufficient to finance the provision of services that certain authority is obliged to deliver. This provides a rationale for central government to pay transfers to the lower levels of government in order to prevent either too low level of service provision at the local level or to prevent local taxes from being too high. The most common example of transfers is associated with the concept of financial equalisation. One of the potentially negative effects of financial equalisation is the so-called fly-paper effect, which denotes a phenomenon of intergovernmental transfers, in particular from the central to the lower levels of government, inflating local government expenditures. Empirical findings have shown that lump-sum transfers of central government tend to have greater stimulatory effect on local government spending than the equivalent increase in the income of the median voter. In essence, this means that transfer money »sticks where it hits«. Financial equalisation tended to be very important revenue source for Slovenian municipalities, as their own-source revenues were not sufficient to finance the provision of local goods and services, since in some fiscal years around 90 per cent of those municipalities received it. The results of an analysis performed for Slovenian municipalities for 2006 fiscal year, tend to support the existence of the effect in municipal financing.

Keywords

decentralisation; local authorities; local public finance; intergovernmental transfers; financial equalisation; fly-paper effect; Slovenian municipalities

Hrčak ID:

131905

URI

https://hrcak.srce.hr/131905

Publication date:

8.9.2011.

Article data in other languages: croatian

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