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

SubsidisationEqualisation

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 criteriaLaw-based versus discretionaryStable and predictable versus buoyant

and evolutiveComplex versus simpleBased on norm costs, average costs or

actual costs?

Objective 2 - Subsidisation

Aim: compensate for spillover effects

Most efficient:National spillovers: earmarked matching

grantsRegional 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 levelPerformance management at local level Internal audit at local level