Revisiting the 35 Percent Rule: An Analysis of Minimum Expenditure Requirements for Local Service Provision

Abstract

        This article reviews the appropriateness of the “35 percent rule,” which defines the share of local government revenue relative to total government net revenue in Thailand.

It adopts an expenditure-based approach and applies a cost function model to estimate the minimum expenditure required for local service provision. The empirical analysis is based on data from a sample of 1,006 local administrative organizations. The analyses indicate that minimum expenditure requirements vary across types of local governments, ranging from 6,548.67 to 19,146.38 baht per capita. At the aggregate level, local governments nationwide require approximately 1.313 trillion baht in annual expenditure, based on fiscal year 2024 data (B.E. 2567). The findings suggest that the appropriate share of local government revenue should be 47.09 percent, which is substantially higher than the current 35 percent benchmark stipulated in the 1999 Decentralization Act. The study recommends a shift in intergovernmental fiscal transfers and tax-revenue allocation from entitlement-based criteria or source generation principle to needs-based allocation, in order to compensate for fiscal imbalances and help to enhance the effectiveness of fiscal decentralization in the long run.