Unconditional Transfers: An Important Instrument of Local Public Finance

Abstract

This study analyzes the role of unconditional transfers as an important instrument for financial management at the local level, using empirical data and findings from previous studies identified through a literature review. Unconditional transfers, as a significant form of financial intergovernmental transfers, are critical for assessing the central government's impact on local development. An in-depth analysis of the unconditional transfer formula, which includes the decentralization of functions and the distribution of grants, represents an essential tool for evaluating their effect on public services. The unconditional transfer is about 1% of the Gross Domestic Product in Albania and the study of the mechanisms of distribution of this fund is very important to scientifically argue its impact on the well-being of citizens.

This study includes all 61 municipalities established under the new administrative-territorial reform of 2015 and aims to assess both the effectiveness and equity of the unconditional transfer distribution formula. It examines how a fair allocation of unconditional transfers influences the quality of public services and contributes to improving investments at the local government level. The study is grounded in existing literature on this mechanism and draws upon the experiences of countries with characteristics similar to Albania, offering a scientific analysis of the unconditional transfer formula and the factors it should incorporate.

The results of this study clearly identify the key factors in the unconditional transfer formula and its impact on the progress of decentralization reforms, offering scientifically grounded recommendations for improving public policies and enhancing the effectiveness of unconditional transfer distribution.

Keywords: Unconditional Transfers, Public Finance, Local Government, Decentralization

JEL Classification: H72; H73; H75

DOI: 10.7176/RJFA/16-4-05

Publication date: May 30^th 2025