GOLD Report I - UCLG

69and at least 35% by fiscal year 2006. Thelatter goal has not yet been reached andthese targets have been the subject ofheated debate. However, the degree oflocal fiscal autonomy is not necessarily afunction of the overall income level of thecountry. For example, Japanese local governmentonly raises 34,4% of its totalincome from own-taxes while local governmentsin China receive only 32% of theirincomes from grants and shared taxes ofcentral government. This disparity reflectsthe very strong role that local governmentin Japan plays as an ‘agent’ of centralgovernment in the delivery of services,especially education and social welfare,which are financed by earmarked intergovernmentalfiscal transfers. In contrast,the much stronger practice of fiscal decentralizationin China through the mechanismof revenue sharing is counterbalanced byextreme political centralization.Ideally, the financial resources at the disposalof a local government –whether fromits own sources 3 or from grants and transfers-should be sufficient to cover all servicesthat it is mandated to deliver. This isnot the case in India, Pakistan and the Philippines.In these countries own-source revenuesof local governments plus transfersreceived are together insufficient to fundthe delivery of local services, suggestingthe need for the devolution of extra taxpowers in order to correct this imbalance.By contrast, the strength of municipalassociations in the OECD countries of theregion has ensured that the correspondingextra revenues required to comply withnew mandates have accompanied thedevolution of new responsibilities to localgovernment. In Australia, such ‘cost shifting’to local government was a centralpoint of a 2006 Inter-Governmental Agreementbetween the Local Government Associationand the federal government. InNew Zealand, it has been one of the majorissues that contributed to successivewaves of local government reform from1989 onwards. Complicating this problemis the issue of ‘unfunded mandates,’namely the predilection of central governmentto legislate further responsibilitiesthat involve an additional fiscal burden onlocal government. This is so in the Philippines,where local government is required to payadditional incentives and allowances todevolved health sector employees andallowances to national government publicservants (e.g. judges and police) whoseoffices lie within its jurisdiction. Theseunfunded mandates have put a strain onthe finances of local government and are aburning issue in the discourse on centrallocalrelations in many other countries inthe region.Borrowing is another source of localgovernment funding. In the past, centralgovernments in most countries of theregion have limited the access by localgovernment to capital markets because ofthe inherent risk that over-borrowing maylead to macro-economic instability. InKorea the size of local government outstandingdebts from bond issues hardlychanged during 2000-2006 because ofthe strong control exercised over localborrowing by central government. InChina, the central government placedstrict limits on the power of local governmentsto borrow, but the latter oftenfound ways to avoid these controls byobtaining loans through their municipallyowned enterprises. Today some centralgovernments in the region are increasinglyencouraging larger municipalitiesto borrow. In Japan, loans are no longersubject to authorization, but only anunderstanding with central government,since April 2006. In India, several of thelarger cities have issued municipal bondsand in the state of Tamil Nadu arrangementshave been made for smaller municipalitiesto join together to issue bonds.Of course, municipal borrowing dependson a functioning capital market as well asthe repayment capacity of municipalities.In the Philippines local governments arelegally enabled and encouraged to tapfinancial markets and other non-traditionalsources of finance in order to make3. Own sources:resources levieddirectly by localauthorities.