CONFIDENTIAL
BLOCK GRANT SYSTEM OF BUDGETARY SUPPORT
The present system of budgetary support (grant in aid) to dependent territories provides no incentive to improve either local revenue raising or forward budgetary planning. In so far as a dependency does attempt to raise additional revenue, this merely coes to reduce the UK grant in aid without providing the territory with any additional fiscal resources. As the grant in aid is calculated on an annual basis on the basis of the territory's Estimates, territorial governments cannot plan their budgetary policy ahead for more than a year in the absence of any knowledge of what HMG's level of grant in aid might be in subsequent years.
For most dependent territories on grant in aid it would probably be preferable to move over to a system of block grants. Under this Gystem the two partico, ie IMG and the territorial government, agrec formally that their joint aim is the eventual elimination of grant in aid. Under this agreement, they undertake a joint examination of the territory's expenditure and revenue forecasts for a three or four year period ahead in order to agree on the annual maximum level of UK grant in aid for each year for the territory examined. This is supplemented by the usual annual examination of Estimates for each financial year to fix the actual level of the grant in aid year by year, which may fall below but cannot exceed the previously agreed maximum. In so far as the actual out-turn in any territory impro ved on that year's Estimates, or the territory raised additional revenue during the year in question, or had a windfall receipt, half the resultant surplus would be returned to IMG but the balance would remain available to the territorial government for development cxpenditure over and above the territory's aid allocation. This system has been applied with considerable success in Malawi, The Gambia and the Southern African territories.
A corollary of this arrangement would have to be that a territory would also have made available to it a projection of the level of UK aid (but not necessarily the full amount) it could expect for the period covered by the block grant period. This would enable the territorial government to develop a coherent budget policy and also the practice of forward development and fiscal planning. Discussions on applying this system to two of the Caribbean dependent territories have already started with Finance Department ODA, but it might well be desirable to give the system wider application, particularly in territories where we can be satisfied with the standard of efficiency of fiscal management.
CONFIDENTIAL
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