Metropolitan Public Finance

This paper by Richard M. Bird and Enid Slack is based on their observation that not all big cities are very rich, but they are all, by definition, big, and most of them are also rich relative to smaller cities, towns, and rural areas in the countries in which they are located. These differences have substantial implications for metropolitan public finance. Not only is the population of big cities larger, it is more concentrated and more heterogeneous in terms of social and economic circumstances. Big cities are also important generators of employment, wealth, and productivity and often are the major economic engines of their countries serving as regional hubs for people from adjacent communities who come to work, shop, and use public services. All these factors have significant implications for the magnitude and complexity of metropolitan public finance.

The authors find that in most countries large cities and metropolitan areas are seldom treated differently than other local governments, however their expenditures are often both much higher and different in nature. They suggest that in part because of their greater ability to pay, big cities should generally have more “fiscal autonomy” than other areas in the sense of being more responsible for delivering local services and for levying and collecting the revenues to pay for such services. However, since the political boundaries of governments in metropolitan areas rarely coincide with the boundaries of the metropolitan economic region, problems arise in coordinating efficient service delivery and sharing costs appropriately across the region.

The authors consider the following questions:

• Do big cities spend more and differently than smaller cities?
• Do big cities have more fiscal capacity to finance such spending?
• How should metropolitan regional finance be structured?
• Which revenue sources are available to and appropriate for metropolitan cities in developing countries when facing the challenges of public finance?

Based on their analysis of metropolitan public finance in practice and theory they find that many challenges and issues face big cities around the world, especially those in developing countries. One problem is that the division of expenditure responsibilities is either not clear or simply wrong. Additionally city leaders must be accountable to the local population and have the ability to manage expenditures and determine revenues. Higher level governments should establish a model “framework” local budget law and financial reporting system and require adequate external audit in order to improve local budgeting and financial systems. They also suggest that metropolitan regions should be essentially self-financing and have greater fiscal autonomy than other urban or rural areas in terms of their responsibility for local services and their ability to levy taxes and collect fees.

This paper was presented at a 2011 conference at The Brookings Institution organized by the Lincoln Institute of Land Policy and is Chapter 6 of the book Financing Metropolitan Governments in Developing Countries.