The Hidden Tradeoffs in Intergovernmental Grants

Transcript

Intergovernmental grants can do real good, but the OECD warns they also carry hidden side effects. One common risk is the fly paper effect, where recipients increase spending by more than they would after an equal rise in local income. Grants can also crowd out own source taxes, because local governments may find it easier to rely on transfers than to raise taxes themselves. Another concern is procyclicality, when grants move in step with local economic swings and end up reinforcing spending booms and busts. The note also points to accountability problems, since large or poorly designed grants can weaken the link between citizens and elected local officials. The bigger lesson is simple: do not expect one grant instrument to solve every problem. Grant design works best when it is matched to one specific objective, because trying to do everything at once can reduce transparency, blur the results, and create inefficiency.