OECD Economics Department Working Papers

ISSN :
1815-1973 (online)
DOI :
10.1787/18151973
Hide / Show Abstract
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
 

Taxes or Grants

What Revenue Source for Sub-Central Governments? You or your institution have access to this content

Authors:
Hansjörg Blöchliger1, Oliver Petzold
Author Affiliations
  • 1: OECD, France

Publication Date
03 July 2009
Bibliographic information
No.:
706
Pages
40
DOI
10.1787/223111363085

Hide / Show Abstract

This paper analyses trends in and driving forces of the revenue composition of sub-central governments (SCG). Between 1995 and 2005 the share of SCG in total government spending increased from 31 to 33%, while the SCG tax share remained stable at around 17%, increasing SCG’s dependence on intergovernmental grants. While equal access to public services is the most common justification for such grants, the grant systems of most countries are much larger than required by equalization. Moreover, rather than smoothing out SCG revenue fluctuations over the cycle, grants often tend to exacerbate them. Finally, there is some evidence that grants reduce SCG tax raising effort, inflate SCG spending and increase SCG deficits and debt. The economic crisis will both sharply reduce SCG’s own tax revenues and – via budget constraints at the central level – increase pressure on the grant system. The crisis could hence help rethink the SCG revenue mix, their tax structure and the size and design of intergovernmental transfers.
Keywords:
fiscal federalism, local tax system, intergovernmental grants
JEL Classification:
  • H42: Public Economics / Publicly Provided Goods / Publicly Provided Private Goods
  • H50: Public Economics / National Government Expenditures and Related Policies / General
  • H77: Public Economics / State and Local Government; Intergovernmental Relations / Intergovernmental Relations; Federalism; Secession