Intergovernmental transfers Taxonomy, objectives and results

Empirical findings of the OECD survey No clear relation between fiscal autonomy and financial decentralisation The gap between sub-national tax and expenditure shares has been widening A high share of grants is often the result of large horizontal imbalances (tax base and spending needs)

Typology of grants  Non-earmarked  Mandatory General purpose grants Block grants  Discretionary  Earmarked  Mandatory Non-matching grants Matching grants  Discretionary Capital grants Current grants

Use of grants – results of the survey Resources other than taxes and grants are scarce Grants are on average 50% for states, regions and provinces States receive over 6% of GDP in grants (1% in Canada to over 10% in Belgium) Grants are on average 40% for local governments Local governments receive on average over 4% of GDP in grants (12.4% in Denmark, to less than 1% in Belgium, Canada, Iceland and Turkey) The central government is by far the most important source of grants In some states, international bodies are an important source of grants

Objectives of grants Financing sub-national services and investments Subsidisation Equalisation

Objective 1: Financing Why choose grants over sub-national taxes? Central government is better able to control sub-national spending Sub-national taxes may have distortionary effects Sub-national taxation may lead to high inequalities Sub-national taxes may have high administrative and collection costs Why NOT choose grants over taxes? Taxes allow sub-national authorities to adapt the level of services to local preferences Asymmetric information and efficient allocation of resources Taxes come with increased accountability Sub-national authorities can’t blame grants for the poor quality of services

Objective 1: Financing Aims of financing grants: Enable sub-national authorities to finance a basic package of services Best: non-earmarked general purpose grants Provide (new) services imposed by the central governement or reach imposed standards Best: non-earmarked grants

Objective 1: Financing Distribution criteria Law-based versus discretionary Stable and predictable versus buoyant and evolutive Complex versus simple Based on norm costs, average costs or actual costs?

Objective 2 - Subsidisation Aim: compensate for spillover effects Most efficient: National spillovers: earmarked matching grants Regional spillovers: stimulation of horizontal co-operation

Objective 3: Equalisation Aim: enable sub-national governments to provide similar services at roughly similar tax effort Types Equalisation of tax capacity Equalisation of service capacity (of spending needs) Best grants: non-earmarked general purpose and horizontal transfers

Equalisation of tax capacity Solidarity, but also economic reasons (incentive to inefficient migration) Measure of tax capacity: revenue collected if depleted at a certain uniform (usually average) rate Caveat: full equalisation removes incentives to increase tax base

Equalisation of service capacity (spending needs) Solidarity and regional/spatial planning (not economic) reasons Reasons for inequal cost per unit of service: Special situation/location Socio-demographic conditions Requires calculation of service cost indicators which Are based on average or norm costs Cannot be influenced by sub-national authorities

Decision making Government is a unitary actor that maximizes the social welfare of the nation But there exists: Central-local loyalties Assymetric information Various forms of lobbying Critical points in grant design: Choice earmarked – non earmarked Distribution formulas Determining tax and service capacity and equalisation level Discretionary grants Efficient decision making: Neutral expertise Limit the influence of lobbying Involve sub-national governments In a setting that encourages objective debate

Council of Europe acquis European Charter of Local Self- Government (Art. 9) Rec(2004)1 on financial and budgetary management at local and regional levels Rec(2005)1 on the financial resources of local and regional authorities

On-going and planned work in the Council of Europe Finalisation of a recommendation on the provision of services at local and regional levels A new general report on local finance in Europe (update of a 1996 report) Finalisation of reports on: Accounting rules and practice at local level Performance management at local level Internal audit at local level