Fiscal federalism 2014 : making decentralisation work

136 Pages·2013·2.975 MB·English

by  OECD

Fiscal Federalism 2014
Making Decentralisation Work
contents
Executive summary Fiscal Federalism 2014
Chapter 1. Fiscal consolidation across government levels
Chapter 2. Sub-central fiscal rules: Making fiscal policy sustainable
Making Decentralisation Work
Chapter 3. Decentralisation, economic activity and educational outcomes
Chapter 4. Sub-central tax competition
Chapter 5. Fiscal equalisation: A key to decentralised public finances
Chapter 6. Reforming fiscal relations
www.oecd.org/ctp/federalism/
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11 2013 01 1 P
Fiscal Federalism
2014
MAKING
DECENTRALISATION WORK
Edited by Hansjörg Blöchliger
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Please cite this publication as:
OECD (2013), Fiscal Federalism 2014: Making Decentralisation Work, OECD Publishing.
http://dx.doi.org/10.1787/9789264204577-en
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FOREWORD
FOREWORD
Foreword
O
ver the past years, state and local governments had to weather the storm of the economic
and fiscal crisis. Some were badly hit; others resurged largely unscathed, depending in part on
whether intergovernmental fiscal frameworks were well structured. Such frameworks are a key
ingredient in fiscal policy, as they can ensure that fiscal consolidation is achieved in an effective
and fair manner.
Fiscal federalism is also about how the public sector is organised and how it creates opportunities
for more growth and well-being. Decentralising the state can restore confidence in public policies and
create a basis for broader policy consensus.
This book presents a compilation of some of the most salient policy issues in fiscal federalism. It
is based on the unique data collected by the OECD Fiscal Network, although it is not about accounting
technicalities. More interestingly, the book documents the progress with fiscal consolidation at the
sub-central government level and provides estimates of further consolidation needs to return debt
to a prudent level. It points out that well designed fiscal rules, those that allow flexibility during
downturns, but are enforced during upswings, help achieve sound public finances. It also includes an
update of the OECD fiscal rules indicator for sub-central governments.
Among its main findings, this work highlights that decentralisation is positively associated
with GDP per capita (although the effect is fairly small); it raises the issue of tax competition
among different jurisdictions; and points to ways by which governments can reap the benefits of
tax competition while avoiding its drawbacks. The text also explains how fiscal equalisation, a key
social ingredient of fiscal federalism, can help to eliminate differences in regional wealth, although
these systems can, in some cases, also reduce the regions’ development efforts. Finally, the main
drivers of reforms are discussed, based on actual experiences and lessons learned. Reforms of fiscal
relations are not an easy task, but they need to be undertaken in order to achieve robust and resilient
intergovernmental fiscal frameworks.
This book draws on the work of the OECD Fiscal Network and the discussions of its delegates.
Financial support from Switzerland is gratefully acknowledged.
Angel Gurría
Secretary-General
FISCAL FEDERALISM 2014: MAKING DECENTRALISATION WORK © OECD 2013 3

TABLE OF CONTENTS
TABLE OF CONTENTS
Table of contents
Executive summary .................................................................................................................. 9
Chapter 1. Fiscal consolidation across levels of government ......................................... 11
Developments up to 2012 ................................................................................................. 12
Sub-central consolidation needs ..................................................................................... 16
Intergovernmental fiscal relations in past consolidation episodes ............................ 22
Policies supporting fiscal consolidation across government levels............................ 26
Notes ................................................................................................................................... 33
Bibliography ........................................................................................................................ 34
Chapter 2. Sub-central fiscal rules: Making fiscal policy sustainable ............................ 37
Why sub-central fiscal rules? ........................................................................................... 38
The design of fiscal rules ................................................................................................. 39
Fiscal rules and the intergovernmental fiscal framework ........................................... 43
Trade-offs and side effects ............................................................................................... 45
Strength of SCG fiscal rules .............................................................................................. 48
Policy considerations ......................................................................................................... 52
Notes .................................................................................................................................... 54
Bibliography ........................................................................................................................ 54
Chapter 3. Decentralisation, economic activity and educational outcomes .................. 57
How does fiscal federalism affect economic development? ........................................ 58
Fiscal decentralisation across the OECD ........................................................................ 58
Decentralisation and economic performance ............................................................... 63
Investment in physical and human capital ................................................................... 66
Decentralisation and educational performance: An assessment of PISA results .... 69
Policy considerations ......................................................................................................... 73
Notes .................................................................................................................................... 73
Bibliography ........................................................................................................................ 74
Chapter 4. Tax competition between sub-central governments ..................................... 77
What is tax competition?.................................................................................................. 78
Tax competition and tax base mobility .......................................................................... 78
No tax competition without tax autonomy .................................................................. 81
The tax mix is the main driver of SCG tax competition ............................................... 82
Other factors affecting tax competition ......................................................................... 86
The impact of tax competition on fiscal outcomes ...................................................... 91
Policy considerations ......................................................................................................... 94
FISCAL FEDERALISM 2014: MAKING DECENTRALISATION WORK © OECD 2013 5
TABLE OF CONTENTS
Notes .................................................................................................................................... 95
Bibliography ........................................................................................................................ 96
Chapter 5. Fiscal equalisation: A key to decentralised public finances ......................... 99
Equalisation – pivot of decentralised fiscal policy ....................................................... 100
Economic disparities across regions .............................................................................. 101
How does fiscal equalisation work? ................................................................................ 102
The equalisation effect ..................................................................................................... 105
Trade-offs and side effects of equalisation .................................................................... 106
Equalisation and macroeconomic outcomes ................................................................. 111
Policy considerations ......................................................................................................... 112
Notes .................................................................................................................................... 113
Bibliography ........................................................................................................................ 114
Chapter 6. Reforming fiscal relations .................................................................................... 117
Introduction ........................................................................................................................ 118
The reform context ............................................................................................................ 121
Timing and scope ............................................................................................................... 124
Designing the reform process .......................................................................................... 128
Policy considerations: What elements make for successful reform?......................... 131
Notes .................................................................................................................................... 132
Bibliography ........................................................................................................................ 132
Tables
1.1. Sub-central governments and debt stabilisation ....................................................... 23
1.2. Intergovernmental transfers and consolidation ........................................................ 24
2.1. Sub-central fiscal rules in OECD countries ................................................................. 41
2.2. Impact of fiscal rules ...................................................................................................... 47
3.1. Decentralisation is positively but weakly associated with economic activity ...... 65
3.2. Public investment is positively associated with decentralisation .......................... 68
3.3. Both sub-central autonomy and school autonomy are conducive
to good educational performance ................................................................................ 71
5.1. Fiscal disparities before and after equalisation ......................................................... 105
5.2. Revenue equalisation levies a large burden on own-tax revenue .......................... 107
6.1. The eleven case studies ................................................................................................. 120
Figures
1.1. Sub-central governments are consolidating .............................................................. 12
1.2. Sub-central debt is stabilising ...................................................................................... 13
1.3. SCG gross financial liabilities are considerable in some countries ......................... 13
1.4. Dispersion of SCG debt .................................................................................................. 14
1.5. Spending has fallen since consolidation started, while tax revenues
have remained stable ..................................................................................................... 15
1.6. SCG spreads have widened ........................................................................................... 16
1.7. Markets are increasingly punishing low-rated SCGs ................................................. 16
1.8. Sub-central government deficits and debt ................................................................. 18
1.9. A few sub-central budgets are far from being sustainable ...................................... 21
1.10. Central and sub-central government balances do not always evolve in parallel ... 25
6 FISCAL FEDERALISM 2014: MAKING DECENTRALISATION WORK © OECD 2013
TABLE OF CONTENTS
1.11. Market mechanisms in public service provision ....................................................... 27
1.12. Taxes on immovable property are typically a sub-central tax ................................ 29
1.13. User charges in OECD countries ................................................................................... 30
1.14. In some countries, grants are pro-cyclical .................................................................. 32
2.1. The hierarchy of the fiscal rules indicators ................................................................ 48
2.2. Sub-central fiscal rules strength, 2011 ........................................................................ 50
2.3. Sub-central fiscal rules strength, evolution ................................................................ 51
2.4. The relationship between fiscal rules and fiscal outcomes is weak ....................... 52
3.1. Channels from decentralisation to economic activity .............................................. 59
3.2. Decentralisation varies considerably across OECD countries .................................. 60
3.3. Decentralisation has slightly increased and converged over the past 15 years .... 60
3.4. The SCG spending and tax composition changes with the degree
of decentralisation ......................................................................................................... 62
3.5. Decentralisation and economic performance ............................................................ 65
3.6. Some countries could gain considerably from decentralising ................................. 66
3.7. Spending decentralisation and the performance of educational systems ............ 70
3.8. Decentralisation and school autonomy are mutual substitutes
rather than complements ............................................................................................. 72
4.1. The tax autonomy of sub-central governments ........................................................ 82
4.2. Taxing power and the tax mix ..................................................................................... 83
4.3. The property tax’s significance is declining ............................................................... 87
4.4. Tax rates and tax raising capacity are negatively correlated .................................. 89
4.5. Regional wealth disparities are narrower in countries with more tax autonomy .. 92
4.6. SCG statutory tax rates tend to rise and to converge ................................................ 93
5.1. Inter-jurisdictional GDP disparities vary across the OECD ....................................... 101
5.2. Comparison of equalisation systems .......................................................................... 103
6.1. Important factors in successful fiscal federalism reforms ....................................... 131
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ExECUTIvE SUMMARY
ExECUTIvE SUMMARY
Executive summary
T
he OECD counts around 140 000 elected sub-central governments (SCGs). By providing
an array of services and transfers and by taxing residents and firms, SCGs influence
economic development and the well-being of citizens. The decentralisation trend of the last
20 years has made SCGs more powerful and more likely to affect the course of a country.
The economic crisis that hit in 2008 left a scar on most jurisdictions, and many still struggle
to balance their budgets. While intergovernmental fiscal frameworks vary widely between
countries, the pressure to rein in deficits and to improve the efficiency of public services
and taxation has become almost universal.
Against this background, this book provides analysis and policy guidance in the area of
intergovernmental fiscal relations and sub-central public finances. The policy issues covered
are of both a structural and a macroeconomic nature. The individual chapters examine:
fiscal consolidation across government levels; sub-central fiscal rules; decentralisation
and economic growth; tax competition between jurisdictions; fiscal equalisation; and the
political economy of reform.
Key findings and recommendations
● Fiscal consolidation across government levels: SCGs have been firmly in consolidation mode
since 2010. So far, SCGs have achieved consolidation through spending cuts, while overall
revenues have remained stable. SCGs in a few countries require additional consolidation
efforts, especially if transfers were cut in the process of central government consolidation.
In order for consolidation to be successful, SCGs should rely more on market mechanisms
in public service provision and better target public investment to where it is most
needed. SCGs should also raise taxation of immovable property and increase fees for
public service use. Central governments, in some countries could reform the transfer
system, including a shift from SCGs relying on central government transfers to relying
on their own taxes.
● Sub-central fiscal rules: Well-designed fiscal rules can help achieve and maintain sound
public finances, while providing room for fiscal manoeuvre in the face of an adverse
shock. During and after the crisis, trade-offs between different policy objectives became
more apparent. Rules have often proven too rigid, thereby reducing their credibility.
Governments should make sub-central rules more flexible, while strengthening
enforcement. Moreover, rules may be more effective if self-imposed instead of imposed
by higher levels of government. Fiscal rules should be a complement rather than a
substitute for well-designed fiscal institutions and for hard SCG budget constraints.
● Decentralisation, economic activity and the performance of education systems: Intergovernmental
fiscal frameworks affect the behaviour of firms, households and governments.
Decentralisation, as measured by sub-central revenue or spending shares, is positively
linked to GDP per capita levels, although the economic effect is relatively small.
FISCAL FEDERALISM 2014: MAKING DECENTRALISATION WORK © OECD 2013 9