The Impact of the Mechanism for Aligning Horizontal Fiscal Imbalances on the Stability of the Financial System

Анотація

The growth of state transfers to equalize regional development disparities affects the stability of the state's financial system. The research aims at determining how the mechanism of horizontal alignment of fiscal imbalances between local budgets affects the stability of financial system of Ukraine. To assess the asymmetry of the alignment formula, we use a quasi-experimental strategy of analyzing potential scenarios, we calculate base grants (for recipient municipalities) and reverse grants (for donor municipalities) for 1439 municipalities in Ukraine. Then we conduct counterfactual experiments, where we change the calculation subject, the number of budgets in calculation and the calculation period. Under different calculation scenarios, we determine whether the alignment mechanism has positive or negative affect on the stability of the public finance system based on the criterion of non-accumulation of budgetary debt. We establish that the current system of horizontal fiscal alignment in Ukraine overstates the fiscal capacity of communities, artificially inflating the indicators of the performance of the imbalance alignment system reform and distorting the overall picture of public finance stability. The alignment system, designed to mitigate unevenness in socio-economic community development, actually exacerbates it. The mechanism for calculating community fiscal capacity, which underlies horizontal financial alignment, requires an improved approach to determining the calculation subject and further reform.

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