Universita’ of Torino, Italy Fiscal equalization systems with standards in a comparative perspective Giorgio Brosio Universita’ of Torino, Italy   Paper prepared for the Conference on Making Fiscal Equalization Work. The Fiscal equalization scheme

Presentation outline Standards and inter-jurisdictional (and interpersonal) equity Standards and transfers: problems with their using. Focus on Italian experience: if you are too ambitious, you fail Conclusions

Before starting, a caveat I understand that the topic may be understood as not relevant for Germany. Not because standards are not used to ensure homogeneity of services, rather the contrary. But,they are not used with equalization transfers. Anyway, since a reform is pending, it may be worth to analyze the issue.

Standards in equalization transfers Main role: implementation of inter- jurisdictional equity, as interpreted by the central government residence of citizens should have no impact on access to public services and on the price paid. Standards inserted into equalization transfers are also associated with interpersonal equity.

Inter-jurisdictional and interpersonal equity Equality of K implies the strictest interpretation of inter-jurisdictional equity: citizens in similar conditions should have access, wherever they reside, to exactly the same quantity/quality mix of services and pay the same amount of taxes.

Inter-jurisdictional and interpersonal equity Strict interpretation: full homogeneity of service provision requires standards determining every relevant characteristic of quality and quantity; making the operation of a decentralized system of government analogous to that of a centralized if the latter is ready to finance it. But with no more rationale for the existence of a decentralized system of government.

Inter-jurisdictional and interpersonal equity The higher the value of parameters c, d, e, f the stronger is their upwards impact on the expenditure, increasing the gap with revenue. Standards expand the vertical imbalance of intergovernmental relations. Average national value of k across all groups of individuals and all subnational governments becomes a measure of the existing vertical fiscal imbalance.

Inter-jurisdictional and interpersonal equity Differences k between groups of individuals describe: the intensity and direction of interpersonal redistribution; and hence: through standards the central government can control the interpersonal redistribution of incomes operated at the subnational level, but it has to be ready to finance it.

Effectiveness of standards The main function of standards in transfers is to determine the total and the individual allocations. Meaning to enable subnational governments to provide services with the characteristics determined by standards. No ability to interfere in the way the service is produced. As done with the Australian system that uses needs not standards

Financial implications the use of standards Problems are related to the number and intensity of standards. Standards can create gaps between expenditure needs that they contribute to determine and: the expectations of subnational governments for funds. the capacity of the central government to provide all the funds required. Standards are likely to set up a tendency to push upwards-subnational expenditure.

Standards in equalization grants and complexity of the formula Difficulties with monitoring and enforcement via conflicts over technicalities; discretion in the implementation; high transaction costs in administration; abuse of the lack of clarity by politicians; surveillance fatigue and confusion; require frequent adjustments; perverse incentives in the provision of information by subnational governments.

Standards- based equalization transfers in Italy Article 117 of the Constitution assigns to the exclusive competence of the central government; the definition of “essential levels of service provision” for a set of basic services: that are considered “necessary to guarantee equality of basic individual and social entitlements across the whole nation”. these services will account for at least 70% of subnational expenditure. Standards- based equalization transfers in Italy  

Standards based equalization transfers in Italy The framework law 42 of 2009 determines the various steps the process Definition for each local function of the essential level of service provision (ELSPs)) more than minimum standards able to ensure sustainable levels of service provision. (a) Estimating for each subnational unit and for each service the standard cost corresponding to the essential level (b) Summing the cost for all the concerned services. (c) Calculating the standardized revenue (d) Determining the net transfer through the difference between c) and (d).

Lagging implementation In Italy After 13 years no proposal for determination of essential levels of service provision for the Regions land of standard costs. Redistributive conflicts among the Regions: applying standard costs will reduce the level of transfers to the less efficient Regions. Also the definition of standards is full of risks in the framework of the fiscal retrenchment connected with the EU Stability Pact. High standards would imply higher transfers paid by the central government, and could imply for subnational governments the taking unsustainable commitments.

Combinations of efficiency and compliance 4. Efficient, but not compliant with levels 1. Efficient and compliant Non efficient and non compliant with levels   2. Non efficient, but compliant        

How ensure compliance? The alternative is between: to accept subnational autonomy and to leave voters (and other political mechanisms) to solve the issue, or b) to intervene with controls and penalties. Considerations on the alternative lead to conclusions.

Conclusions Not too much to expect from introduction in transfers of standards impacting on the quantity/quality mix, be they equalization transfers, but also conditional. Enforcement is not easy. It must come mostly by citizens who consume the services and can/should check if what they receive correspond to the standards. This suggests to use few standards with very clear meaning, referring to crucial principles and issues.