What is Fiscal Decentralization?

Malcolm Tatum

Fiscal decentralization is an approach that calls for disbursing the control of finances to various points within a network or operation rather than having all financial control residing at a single point within the network. This type of fiscal policy is sometimes used in various business models, allowing jurisdictions within the overall company structure to have a fair amount of autonomy with the day-to-day management of assets and liabilities, while still remaining somewhat accountable to a central organization. Governments may sometimes use fiscal decentralization as well, allocating certain financial management tasks and assets to states or provinces rather than managing those tasks and assets at the national level.

Woman holding a book
Woman holding a book

The actual process of fiscal decentralization can take on many different appearances, depending on the nature of the organization that is choosing to use this method rather than one of the other types of fiscal policies. The process may call for allocating funds received at a headquarters or central office to local offices, making those offices accountable for how the money is used. This approach is not uncommon in a number of government structures. At other times, the process may call for the receipt of funds directly from customers at the local level, with a portion of those receipts assessed and forward to support a national umbrella organization. With both models, the responsibility for using the funds to manage the day to day operations of the local jurisdictions rests with those jurisdictions rather than a central organization.

There are a number of pros and cons associated with fiscal decentralization. Proponents of the measure typically note that responsible parties at the local level are in a better position to asses how to use the available capital to best effect, often purchasing necessary supplies from local vendors, a move that helps to stimulate the local economy and encourage that community to regularly purchase goods and services from the company. In this manner, rapport is established that would be somewhat difficult to achieve if all financial transactions were being made at some distant headquarters.

Critics of fiscal decentralization note that while there may be some advantages to the process, there are also a number of potential pitfalls. One has to do with the lack of responsible management of finances at the local level. Funds may be spent in ways that are not in the best interests of the company, such as favoring the purchase of supplies from a local vendor at inflated rates when those same goods could be obtained for less through a volume purchase agreement coordinated through a central office. For this reason, many entities will approach fiscal decentralization with the need to develop specific checks and balances that make it possible to enjoy the benefits of the arrangement while also minimizing the opportunity for the approach to be intentionally or unintentionally abused.

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