Fiscal Decentralization in Peru: Achievements and Challenges

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1 XXV Seminario Regional de Política Fiscal de la CEPAL Taller de Finanzas Públicas Fiscal Decentralization in Peru: Achievements and Challenges Gonzalo Neyra Araoz Santiago de Chile 05 al 07 de marzo de 2013

2 Institutional Features Peru is a unitary and decentralized State, divided into regions, departments, provinces and districts Three levels of government: national, regional and local. The are political and administrative autonomy of local and regional governments Decentralization as a permanent public policy of State

3 Assignment of spending responsibilities NATIONAL REGIONAL LOCAL Foreing Affairs Defense Justice Police and Internal Security Monetary and Fiscal Policy Social Welfare Policy International trade Taxation Education Health Environment Industrial Policy Roads and Telecommunications Energy Land Use Local Economic Development Urban management Parks and Recreation Water, Sewerage and Sanitation Public Transportation

4 Revenue Sources NATIONAL REGIONAL LOCAL Personal Income Tax Business Income Tax Value Added Tax Excise Tax Impuesto a las Importaciones Excise Tax Vehicle Tax Property Tax User charges, fees and contributions Intergovernmental Fiscal Transfers

5 Intergovernmental Fiscal Transfers Fiscal Transfers Receiver Allocation Coverage Use Canon and Royalties L y R Rule Partial Invesment Renta de Aduanas L Rule Partial Invesment Ordinary Resources L y R Discretionary All Free FONCOMUN L Rule All Free FONCOR R Rule All Invesment FONIPREL L y R Competition Parcial Invesment Other transfers L y R

6 A decade of Fiscal Decentralization

7 Structure of Income and Expenditure of the General Government, 2011 (Percentages) Ingresos Gastos Nivel de gobierno % del PIB Total % del PIB Total General Nacional Regional Local Despúes de transferencias Nacional Regional Local Source: MEF and BCRP

8 Evolution of Decentralized Government Spending Government expenditure as% of GDP Structure of government expenditures by level of government Source: INEI y MEF Source: MEF

9 Government expenditure 1/ per capita, by to department 2011 Source: INEI y MEF 1/ Not considered expenditures on Debt Service, Defense and Foreign Affairs

10 Source: MEF Importance of Fiscal Transfers in Financing Local Governments (% of GDP)

11 Source: MEF Fiscal Transfers of Canon and Royalties to the regional and local level (Millions of Nuevos Soles)

12 Fiscal Transfers per capita of Canon and Royalties by departament, 2011 (In Nuevos Soles) Source: MEF

13 Territorial Distribution of Canon and Royalties Transfers Source: Ministerio de Economía y Finanzas

14 Challenges of Fiscal Decentralization in Peru 1. Enhancing local tax collection. 2. Encourage improvements in the quality of local and regional spending 3. Improved performance of intergovernmental fiscal transfers in regional equalization. 4. Improvements in the management and registration of regional and local debt. 5. Institutional strengthening of subnational governments in the fiscal management

15 Improvement of local tax administration 1. Institutional strengthening of urban local governments (cadastre and tax administration; link with COFOPRI and SUNARP). 2. Improving the management of cadastral valuations and human resources. 3. Assessment eliminate exemptions. 4. Updating of the values for determining the property tax. 5. Vehicle tax: the tax needs to broaden the tax base. 15

16 Improving the quality of spending in the local and regional level 1. Delineate a clear assignment of expenditure responsibilities. 2. Costing at the regional and local decentralized service delivery. 3. Formalize a multi-year framework of sub-national public budget. 4. Strengthening sub-national system of performance evaluation and accountability mechanisms. 5. Strengthen the Budgeting for results approach in formulating the subnational budgets. 16

17 Improving the performance of Intergovernmental Fiscal Transfers 1. Compensate territories that do not receive transfers of canon and royalties in the framework of territorial cohesion goals. 2. Establishment of stabilization funds to reduce volatility associated with natural resource transfers. 3. Link the use of transfers to close gaps in the regions and municipalities. 4. Improving mechanisms for evaluating the use of transfers and strengthen accountability. 5. Avoid substitution effects on municipal tax collection 17

18 Conclusions 1. Advances in fiscal decentralization have been mainly on the expenditure side and funded by fiscal transfers from the national level. 2. Tax sources are concentrated in the national government, there is a marginal participation at the local level. 3. Fiscal relations between the three levels of government show high vertical imbalance. 4. The distribution of government spending and revenue in country shows a horizontal imbalance.