Off-budget activities of local government: Comment

“The conclusion of this analysis is that tax limitations have brought about an unforeseen improvement in the structure of local government. While the actual implementation in particular cases may not always lead to desirable results, there is hope for improvement. The important consideration is not whether spending is at some particular optimal level, but whether the fiscal constitution has changed so as to generate more rational outcomes. As Professor Buchanan has emphasized, economists should be ‘process-oriented’ rather than ‘outcome-oriented.’ This paper has presented analysis to indicate that the fiscal processes of local government may well have been improved in an unexpected manner.”

Bennett and Dilorenzo have provided evidence that limitations on taxes and spending induce a proliferation of special purpose local government. They conclude that the effects on spending were less than originally supposed. Whatever the effects on total spending, a very important effect on the limitations is an induced change in the fiscal constitution of local government. Using a public choice approach, this institutional change was found to have certain desirable features.

Decreased fiscal illusion and increased accountability is obtained by separating the functions of government and their sources of revenue. This is done by placing general purpose government expenditures ‘off-budget’ and on to a separate special purpose government budget. In effect, the proliferation of governmental units allows for the earmarking of revenues. This allows for more rational decisions in a democratic setting and also limits the exploitation of taxpayers in a nondemocratic setting. The proliferation of governments also allows for more competition among governments and lower public service costs. In addition, alternatives in public services levels may increase consumption efficiency.

Published in Public Choice | R. Blewett | 1984,,