Question

Outline the major types of intergovernmental grants and their effects

Answer 1

Intergovernmental grants (I G) are the grants which flow from federal government to subnational governments i.e. from federal government to state and local governments.

Types

1. Categorical- These are highly conditional grants and the legislation  generally describes the conditions of the categorical grant and specifies the type of activities to be funded. The Federal govt has an upper hand in determine the usage of categorical grant. For instance railways, roadways etc.

These are further classified into matching, non-existant matching and cost reimbursement grants

a. The matching grant requires equal funds to be provided by the recipient of the grant.

A1 open-ended matching grant- there will be no limit on the appropriation level at the federal level. It is based. on the individual’s eligibility and the state matching requirements for matching open-ended grants

A2 close ended matching grant- The grants that comes with stipulated maximum appropriation in a specific fiscal year and specified statutory matching requirement is closed-ended matching grants

Non matching grants do not require funds to be matched at. However federal govt does outlines a maximum appropriation level in specific year

2. Block- These are the grants that provide a higher discretion of usage to the recipient. This increases the power of state govt

3. Shared revenues- In shared revenue, federal government has a low degree of discretion over who is receiving the grant and the recipients have broader discretion of deciding what funding activities to be carried upon using the shared revenues.

Their effects

IG forms one of the dominant revenue source of subnational govts.

These grants are important as they strengthen the public sector and improve the financial health of subnational governments.

Equalisation - redistribution of resources to equalize tax capacity

Subsidisation - Improving the services by subsidizing the services.