form of unconditional grants, where their final use is determined by the subnational governments through their budgets, or through conditional (earmarked) grants to subnational governments to implement selected service delivery and expenditure responsibilities—for example, by function or program, typically in accordance with an agreed-upon regulatory or policy standard. The overall level of grants (that is, the vertical allocation) will usually be determined by policy decisions at the central government’s discretion or as part of constitutional negotiation processes, and is not assessed by this indicator. However, clear criteria for the distribution of grants among subnational governments—for example, formulae for the horizontal allocation of funds—are needed to ensure allocative transparency and medium-term predictability of funds available for planning and budgeting of expenditure programs by subnational governments. Every fiscal transfer from central government to the relevant subnational governments should be taken into consideration. If different formulae or criteria are used for different elements of transfer, the overall assessment may be made on a value-based weighted average.

Dimension 7.2 assesses the timeliness of reliable information provided to subnational governments on their allocations from central government for the coming year. It is crucial for subnational governments to receive information on annual allocations from central government well in advance of the completion (and preferably before commencement) of their own budget-preparation processes. Information on transfers to subnational governments’ budgets should be regulated by the central government’s annual budget calendar, which should provide for reliable information on allocations early in the cycle.