The territorial fiscal gap in Colombia

Abstract

This paper presents an estimation of expenditure needs and fiscal capacity of Colombia's municipalities and departments in 2014. We use standard per capita norms to estimate the spending needs and data envelopment analysis for the local fiscal capacity. The results show that: (i) there are high horizontal fiscal disparities in Colombia, with greater incidence in municipalities than in departments; (ii) these disparities favor more developed territories; and (iii) there is evidence of a centerperiphery pattern in the horizontal fiscal disparities, causing central regions of the country to have a lower imbalance between expenditure needs and fiscal capacity. An equalization transfers system is an option for public policy to eliminate these disparities.Keywords: horizontal fiscal disparities, fiscal capacity, fiscal needs, data envelopment analysis.JEL Classification: H71, H73, H77, R12.sub-national governments (Dirección General de Apoyo Fiscal, 2009;Bonet et al, 2014.;Villa et al., 2014).The main purpose of this paper is to measure horizontal fiscal disparities in Colombia, taking into account expenditure needs and fiscal capacity jointly both for municipalities and departments. This study contributes to the discussion of fiscal disparities and transfer systems. Based on the results, there will be an estimate of the territorial fiscal gap, understood as the difference between expenditure needs and local potential revenue in each territory. This estimate will provide ground for discussion about the need to implement a transfer system with fiscal equalization in Colombia.This document consists of six sections. The second one presents a review of existing literature on the estimation of horizontal fiscal disparities, explaining the advantages and disadvantages of each method. The third section presents the methodology we followed to calculate expenditure needs and fiscal capacity. The fourth part presents and analyzes the results, while the fifth discusses a possible reform of the country's current fiscal transfers system. Finally, the sixth presents the conclusions and recommendations. The Theory and Practice of Horizontal Fiscal DisparitiesHorizontal fiscal disparities are the difference between the expenditure needs and the fiscal capacity of a sub-national government (Norrie et al., 1982;Le Grand, 1975;Porto and Rosales, 2008). If expenditure needs exceed fiscal capacity, the local government requires transfers to cover such needs. On the contrary, if a territory has a higher fiscal capacity than needs, it is able to transfer resources to other jurisdictions to reduce the fiscal gap.