A categorical is a grant sent to the national budget to use for specific purposes, which are established by the body that transfers funds from a higher level budget. Part of the federal budget allocation is distributed among the regions to finance their participation in the implementation of national programs.
Funding in most countries flows through the three main channels for mobilizing cash resources. The first is revenues from their tax and non-tax income. The second channel is related to borrowed funds in the loan capital market. The third type of financial revenues from tax incentives and financial support of regional budgets in the form of federal transfers that generate their income. Categorical grants are allocated for targeted financing of a specific program or project.
By the mode of use, targeted grants fall into categorical and block grants. For example, in the USA, a categorical grant is the primary type of federal assistance to the states and is sent for the implementation of separate spending programs. Categorical grants are directed to highly specific goals, such as the construction of an appropriate type of road, the development of education, and preventive measures to warn a particular disease. Categorical grants formed by tax deductions are based on strict legislative fixing of interest. Therefore, such grants depend on specific decisions of a higher budget body.
A categorical grant is sharing if the region is required to supplement it with allocations from its sources to achieve the purpose for which the subsidy is intended. The area has the right to apply for such a grant only when it is ready to spend its funds for the goal supported by the central government. National and regional budgets enter into a share for the acquisition of a specific public boon. A categorical grant is non-sharing if it is aimed, for example, at improving the water supply to settlements in the region. According to the requirements of the distribution policy, the federal budget fully finances the creation of the corresponding local public goods. In this regard, the national budget acts as a channel through which funds are transferred.
The second category of targeted includes block grants formed from fixed share deductions from federal tax revenues. Through block grants, it becomes possible to maneuver the funds received freely. The block grant is available to the state with a broad statement of objectives, and each country develops a scheme for its distribution independently, either to selected parts of the block or to the entire block. The problem of the functional and structural overload of the federal government is solved by applying for block grants. Reduced financial costs are associated with the maintenance of excessive administrative and managerial links, as well as the volume of regulatory documentation.
One of the significant tasks of inter-budget transfers is to overcome the imbalance of the budget system. Horizontal alignment involves a proportional distribution of the tax burden between the subjects of the federation to reduce the inequality of tax opportunities in different territories. Thus, the differentiation of the population by the level of average per capita budget income and the leveling of regional differences in the cost of living, cash income and expenses of the people are taken into consideration.