Fiscal Governance and Public Services: Evidence from Tanzania and Zambia

Does a government’s source of revenue explain its policies? The predominate view in development studies contends that policy variation results directly from institutional variation. Building on a literature which we label fiscal theories of governance, we argue that a government’s sources of revenue strongly affect its public expenditures, independent of institutions. Using data from local government budgets in Tanzania and Zambia, we find that local governments in both countries produce more public services as their budget’s share of local taxes increases. Alternatively, revenue that local governments receive from sources outside their boundaries -transfers from the central government and foreign assistance -increases the share of local budgets consumed by employee benefits and administrative costs. Because there is no variation in the powers of local governments in Tanzania and Zambia, the effects of revenue sources on public expenditure that we find are independent of political institutions. The results suggest that fiscal accountability is an important factor to consider when designing policies to enhance local government capacity. Barak Hoffman Clark Gibson UCSD UCSD 9500 Gilman 9500 Gilman La Jolla CA 92093-0521 La Jolla CA 92093-0521 858.248.9087 858. 822.5140 [email protected] [email protected]