FISCAL ILLUSION AT THE LOCAL SPHERE: AN EMPIRICAL TEST OF THE FLYPAPER EFFECT USING SOUTH AFRICAN MUNICIPAL DATA¹

Abstract

While South Africa operates a relatively decentralised governance and administrative structure, an important feature of the country's intergovernmental fiscal relations system is the gap that exists between the expenditure responsibilities of sub‐national authorities and their assigned revenue bases. The resulting vertical fiscal imbalance is mainly addressed via significant intergovernmental transfers to provinces and local governments. This factor presents strong a priori grounds for assuming that in the South African context, the heavy dependence of many local governments on intergovernmental transfers may generate fiscal illusion. Despite this, there have not been many empirical studies of fiscal illusion in South Africa's intergovernmental transfer system. This paper extends existing literature on fiscal illusion by using the fiscal year 2005/06 financial and expenditure data from 237 local government authorities in South Africa to evaluate the flypaper variant of the fiscal illusion hypothesis. Empirical results indicate that the marginal effects of municipal own‐source revenues on local expenditure exceed those of intergovernmental transfers. No statistical evidence in support of the flypaper hypothesis within the context of municipal expenditures in South Africa is found.

Fiscal Expenditure Structure, Vertical Fiscal Imbalance and Environmental Pollution

“…In a study, Boett et al, found that the Italian government's enhancement of the degree of self-financing of lower-level governments was conducive to easing vertical fiscal imbalance [29]. In a study on South Africa, Amusa et al, found that enhancing the degree of local self-sufficiency was more beneficial to easing vertical fiscal imbalance, instead of fiscal transfer payments among governments [30]. Oates believed that excessive vertical fiscal imbalance may make local governments rely too heavily on transfer payments.…”

Fenomena Flypaper Effect Pada Belanja Daerah Kabupaten/Kota Di Indonesia

“…Penelitian mengenai flypaper effect juga dilakukan oleh Amusa et al (2008) dengan menggunakan sampel pemerintah daerah di Afrika Selatan. Hasil penelitiannya menunjukkan bahwa dampak pendapatan asli daerah di Afrika Selatan melebihi dampak dana transfer dari pemerintah pusat.…”

Transfer revenues, expenditures and tax effort of Slovenian municipalities

“…These control variables are integrated into the model, since the majority of them are usually standard in the empirical literature dealing with the analysis of expenditure and tax effort effects of intergovernmental transfers (Worthington and Dollery, 1999;Amusa et al, 2008;Saruc and Sagbas, 2008;Acosta, 2010). For instance, the exposition given in Worthington and Dollery (1999) or in Amusa et al (2008) specifies expenditure function for governmentally provided goods as the function of the total amount of resources that are available for funding such expenditures, the function of the relative tax price of expenditures, and the function of institutional and other factors that affect expenditure outcomes. Saruc and Sagbas (2008) have utilised variables such as local gross domestic product (GDP), revenue sharing, total population, population increase, share of industry in local GDP, urbanisation and immigration rate in their estimations of local government functions.…”