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A dynamic model of deficit sharing mechanism

Drezgić, Saša; Grdinić, Maja; Blažić, Helena
A dynamic model of deficit sharing mechanism // 12th International Conference "Challenges of Europe: Innovative Responses for Resilient Growth and Competitiveness"
Bol-Brač, Hrvatska, 2017. (predavanje, međunarodna recenzija, neobjavljeni rad, znanstveni)

A dynamic model of deficit sharing mechanism

Drezgić, Saša ; Grdinić, Maja ; Blažić, Helena

Vrsta, podvrsta i kategorija rada
Sažeci sa skupova, neobjavljeni rad, znanstveni

12th International Conference "Challenges of Europe: Innovative Responses for Resilient Growth and Competitiveness"

Mjesto i datum
Bol-Brač, Hrvatska,

Vrsta sudjelovanja

Vrsta recenzije
Međunarodna recenzija

Ključne riječi
Dynamic model, deficit financing, deficit sharing mechanism, local governments, intergovernmental fiscal relations
(Dynamic model, deficit financing, deficit sharing mechanism, Local governments, intergovernmental fiscal relations)

Issue of deficit sharing within the tiers of intergovernmental fiscal system has been one of the clearly addressed scientific and practical problems for a long time. However, both research and practice have not provided generally accepted and satisfactory models and solutions. This is not surprising because the problem is far from being simple. One of the key challenges is to resolve an everlasting conflict between central and subnational government tier related to different perspectives of each jurisdiction. Namely, central government level is more concerned for macroeconomic position and usually is more inclined to centralise debt management and limit borrowing powers of subnational government. On the other hand, subnational government utilizes borrowing for large local communal infrastructure needs but faces short-term perspective of political mandate, which demands control aimed for prevention of excessive borrowing. Of course, the extent of this conflicted interest depend on overall degree of fiscal decentralisation. More decentralised systems have such problem of borrowing power and investment need mismatch in a lesser extent. In addition, heterogeneity of local governments in terms of fiscal capacity and fiscal position makes general deficit sharing mechanisms as poor solution to intergovernmental fiscal management. General deficit sharing mechanisms usually base on fixed budgetary limits, which do not enable control for weak subnational government units and exert too high limitations for more progressive ones. The goal of optimal system of deficit sharing mechanism is to allow flexibility in the system by utilizing a dynamic model, which enables simultaneous solutions for two problems. First one is to control overall general government deficit target by deriving dynamic threshold for overall subnational government deficit limit. Second goal is to devise a model, which allows different borrowing limits that base more on individual local government borrowing capacity. Such an approach provides incentive for more productive borrowing policies and overcomes short-term financing perspective that comes from short-term political horizon and mid-term focus of budgetary documentation. It is also possible to augment such general dynamic model by various financial options available for financing local governments. This predominantly refers to grants from different supranational and international sources and alternative models of financing, such as concessions and private-public partnerships. For the latter, it is particularly important to address concessions and private-public partnerships that do not classify as public borrowing vehicles because they extend budgetary potentials in financing investment projects. The results of the research bring clear policy recommendations. It is possible to replace existing deficit sharing mechanisms by more productive and efficient dynamic system. This would bring not just improved debt management control but provide incentive for more efficient borrowing.

Izvorni jezik

Znanstvena područja


Projekt / tema
HRZZ-IP-2013-11-8174 - Porezna politika i fiskalna konsolidacija u Hrvatskoj (Helena Blažić, )

Ekonomski fakultet, Rijeka