The Importance of Functions Assignment for the Intergovernmental Fiscal Relations

Abstract

The purpose of this paper is twofold. First, to review the basic principles of functions assignment among the different levels of government. Second, to show on the example of Lithuania, how inadequate assignment of functions leads to instability and disharmony in the practice of decentralizing country.

Nevertheless it is said that there is no absolute best way for designing of functions assignment among various levels of government, some basic principles, deriving from the theory of fiscal federalism, could be applied, especially for post-Soviet countries.

Therefore, first of all the paper starts with the reminder of Musgrave’s Theory of Public Finance, pointing up threestate- function framework. After we will go through several decentralization criteria, justifying assignment of functions to levels of government. And finally we will provide an example of the functions assignment to Lithuania local government tier, emphasizing the main problems, coming from the inadequate assignment and conditioning further issues, concerning resources allocation and tax power division.

There are several reasons, why allocating fiscal resources and budget transfers among levels of government must come after a clear assignment of functions. Generally accepted intentions of fiscal decentralisation involve an efficient allocation of resources determined by an efficient assignment of functions. Therefore, transition countries, especially Post-Soviet, new EU member states, pursuing decentralisation development, should take into account the common principles of functions’ assignment, trying to avoid unclearness and ambiguity in the field of fiscal intergovernmental relationships.

The assignment of functions and responsibilities across levels of government is changeable, developing with unstable social and political situations. In addition, political and economical systems are always adapting to new demands, changing laws. The main problem in this situation is how to satisfy the evolving residents’ needs in the proper way within the current or prospective legal system.