Equalization effects of local financing models in Portugal

Fortuna, Mário; Vieira, José Cabral; Mendes, Margarida

http://hdl.handle.net/10400.3/1137

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Authors

Fortuna, Mário

Vieira, José Cabral

Mendes, Margarida

Abstract(s)

One objective frequently found in models of decentralized financing is that of equalization. The concern is that poorer jurisdictions receive enough resources for basic services and for development promotion, thus eliminating horizontal and vertical imbalances. In Portugal, decentralization has occurred at two levels: the local, for the whole country and the regional for the autonomous regions of the Azores and Madeira. Decentralization to local governments has undergone several changes in recent decades. The current paper focuses on testing for the presence of an equalization effect in the models adopted to finance municipalities in Portugal, since the nineteen nineties. Using the theoretical background that maintains that for the presence of an equalizing effect it is necessary that, on a per capita basis, poorer regions or localities receive relatively more transfers than the richer jurisdictions, a test is made using a data set that includes all municipalities of Portugal. The situation of the two autonomous regions is controlled with dummy variables. The hypothesis that the models used have an equalizing effect is tested through the sign of the coefficient of the regression of per capita transfers on per capita own resources. In the presence of an equalizing effect the sign will be significant and negative. It is confirmed that, for the period under analysis, the municipalities with lower per capita own revenues are those that receive more transfers per capita. There is, therefore, an equalizing effect in the current transfer system to municipalities. Using pooled data, one can also conclude that the equalization effect has become stronger with the 1998 and 2002 reviews of the system, when compared to the system in effect in 1991.