Public financial management in decentralized and decentralizing environments

An overview of issues and recent literature by Paul Smoke

Public financial management (PFM)—-the science and art of budgeting, spending, and accounting for public funds—-is among the most fundamental elements of public sector reform. PFM not only helps to ensure that there are clear rules and processes for managing public resources, but it also provides citizens with information they can use to evaluate the revenue generation and service delivery performance of the governments that serve them.

PFM reforms are essential for realizing the expected benefits of decentralization because of their central role in enhancing managerial efficiency, transparency, and subnational government accountability to both higher levels of government and to local constituents. Similarly, subnational governments can be critical actors in the successful implementation of national PFM reforms in countries that are decentralized or decentralizing.

Although PFM reforms require standardized rules and central oversight, some subnational autonomy is also important for effective decentralization. PFM reforms that are too lax risk enabling irresponsible local government fiscal behavior, however if overly restrictive it can constrain local government discretion to the detriment of decentralization. One of the most critical issues in subnational PFM is getting an appropriate balance between central oversight and local autonomy, as outlined in Ter-Minassian.

In this ‘Reading pack’ prepared for GSDRC, Professor Paul Smoke (NYU) addresses the relationship between PFM and decentralization reforms and offers suggested key readings.

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