OECD Fiscal Federalism Studies

2225-4056 (online)
2225-403X (print)
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The OECD Fiscal Federalism Series presents policy analysis of, and statistics about, intergovernmental fiscal relations and state/regional and local public finance. It draws on the work of the OECD Network on Fiscal Relations across Government Levels and of other OECD bodies covering these areas.

Reforming Fiscal Federalism and Local Government

Reforming Fiscal Federalism and Local Government

Beyond the Zero-Sum Game You do not have access to this content

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Hansjörg Blöchliger, Camila Vammalle
15 Feb 2012
9789264119970 (PDF) ;9789264098411(print)

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This book describes and examines reforms of fiscal federalism and local government in 10 OECD countries implemented over the past decade. The country chapters identify common patterns and factors that are conducive to reforms of the intergovernmental fiscal framework, using a common methodological approach. The summary chapter highlights the cross-cutting issues emerging from the country chapters and shows the key factors in the institutional, political, economic and fiscal areas that are supporting reform success. The report’s approach results in valuable insights for policy makers designing, adopting and implementing fiscal federalism and local government reforms.

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  • Foreword and Acknowledgements
  • Executive summary
  • Reforming fiscal relations: Going beyond the zero-sum game

    One of the salient features of fiscal federalism in OECD countries during the past decade has been a trend toward decentralisation, as policy reforms have increased the power of state and local governments. From 1995 to 2008 the average share of sub-central in general government spending rose from less than 31% to more than 33%, while the share of sub-central in general government tax revenues rose from 16% to 17%. Some countries have embarked on a long-term decentralisation path involving wide-ranging changes to their institutional arrangements (). However, many attempts to reform fiscal relations have encountered difficulties. Various reforms – including the territorial reorganisation of public service delivery, changes to the sub-central tax structure and the tightening of sub-central fiscal rules – have stalled or been introduced only partially and after several unsuccessful attempts. The technical and political obstacles to wide-ranging reforms of fiscal arrangements are formidable. The question arises as to how they may be overcome and the benefits of decentralised policy making fully realised, especially in a context where sub-central governments will have to share in the efforts of fiscal consolidation.

  • Australia: The Intergovernmental Agreement on Federal Financial Relations

    On 29 November 2008, the Australian government (hereafter Commonwealth government) and the states and territories (the states) agreed on an Intergovernmental Agreement on Federal Financial Relations that came into effect on 1 January 2009 and profoundly changed Australian fiscal federalism. The agreement provided an overarching framework that aims at improving the quality and effectiveness of public service delivery in Australia. The Intergovernmental Agreement consisted of three pillars: i) an increase in the states’ flexibility in service delivery; ii) more state accountability to the public for the quality and effectiveness of services; and iii) a considerable increase in the amount of federal funding for some key services. The Intergovernmental Agreement built on previous reforms such as the introduction of the Goods and Services Tax in 2000 and is generally considered to be one of the widest-reaching reforms in the history of Australian intergovernmental fiscal relations (see ).

  • Austria: The reform of the fiscal equalisation law

    In 2008 the Austrian parliament endorsed a new fiscal equalisation law that changed the revenue mix of both the state and the local level, and amended federal funding for social benefits and the health care system (). The reform consisted of several elements: i) a transformation of most intergovernmental grants into a higher sub-central government (SCG) share in federal tax revenue; ii) an increase in intergovernmental transfers for mandated health care and social welfare responsibilities; iii) a change in the equalisation formula that allocates payments between small and large sub-central governments; and iv) a change in underlying population statistics. In addition, procedural legislation for levying taxes and fees was harmonised across the nine states. The 2008 fiscal equalisation reform was considered quite significant and also seems to have provided a push for a wider-reaching institutional and fiscal relations reform.

  • Belgium: The Lambermont Agreement

    In 2001 both Chambers of the Belgian parliament endorsed a special law that substantially changed the revenue structure of Belgium’s regional entities and the financial balance between the federal and the regional level. The Lambermont Agreement, as it was called, consisted of two distinct elements: i) the re-assignment of several taxes to the regions and further tax autonomy for them; and ii) a considerable increase of federal transfers to the communities. The Lambermont Agreement was the latest in a succession of fiscal decentralisation reforms and the widest-reaching tax assignment reform since Belgium had started to decentralise in the 1970s ().

  • Canada: The equalisation reform

    In 2007, the Canadian government reformed its federal-provincial fiscal equalisation system. Equalisation was simplified, the distribution formula overhauled, and total equalisation payments were no longer subject to a cap. The national fiscal capacity standard was redefined, including a new assessment of provincial revenues from natural resources. The reform, considered as one of the farthest-reaching since the inception of the scheme in 1957, was meant to appease some long-lasting controversy between the federal government and the provinces as well as among the provinces (). Overall, it led to considerable spending increases for the federal government, in large part driven by the interaction of the new formula with record oil prices. After the financial and economic crisis struck in 2008, the reform was revisited and total federal equalisation payments were again submitted to a ceiling.

  • Denmark: The Local Government Reform

    On 1 January 2007, a new administrative map of Denmark was created, as the Danish Local Government Reform came into force. The number of municipalities was reduced from 271 to 98 by mergers, and the 13 counties were abolished and replaced by five regions (). A process of controlled voluntary mergers resulting from a political agreement between the main political parties forced municipalities to merge until they reached a minimum size of 20 000 inhabitants, while leaving them freedom to negotiate with their neighbours to create the new boundaries. The main objective of the reform was to adapt public service delivery to technological change and increasing demand, while leaving the Danish public sector decentralised. The public sector and service levels had grown over the years, and small municipalities could no longer provide the level of services that was now required. Municipal mergers were therefore seen as an alternative to recentralisation.

  • Finland: Restructuring local government and services

    In 2007, Finland started implementing the act on restructuring local government and services (also known under its acronym PARAS reform), which aims at creating economies of scale by encouraging voluntary municipal mergers and municipal co-operation areas for public service delivery. Given the high degree of municipal autonomy in Finland and the country’s tradition of consensual decision-making, it was not possible to use threats or sanctions to force municipalities into implementing the reform (as was the case in Denmark, where municipalities were given one year to merge voluntarily, and if they did not comply, the central government could impose the merger). Municipalities could therefore choose between merging and joining larger co-operation areas, but financial incentives were used to encourage municipalities to merge. Municipal mergers were already on the agenda before this reform, and in 2002, a substantial increase in merger subsidies was granted to municipalities wishing to merge. This led to a reduction of the number of municipalities from 452 in 2001, to 432 in 2005. The PARAS reform () further reduced the number of municipalities to 348 in 2009, and municipalities have until 2013 to benefit from financial incentives under the current framework.

  • Italy: Law 42 on fiscal federalism

    In 2009, the Italian parliament endorsed Law 42 on fiscal federalism, setting a milestone for Italy’s gradual move towards decentralisation and federal institutions. The law, which is based on a constitutional amendment passed in 2001, increased tax and spending autonomy of the regions, provinces and municipalities and overhauled the equalisation system, tackling the wide fiscal interregional differences in a consistent and efficient fashion (). A set of legislative decrees, some of which have not yet been implemented, determines intergovernmental tax arrangements, equalisation, fiscal rules and accounting harmonisation. The cost of the reform to both the central and sub-central governments is not yet known, but there is strong pressure for the reform to remain fiscally neutral.

  • Portugal: The reform of the Local Finance Law

    In January 2007, a new Local Finance Law came into force, whose objective was to increase the equity and efficiency of sub-central public finances, while being financially neutral for the central government (). One of the main aims of this reform was to tighten the budget constraint and to reduce the revenue dependence of municipalities on immoveable property. In particular, municipalities relied heavily on housing transaction fees as a revenue source, which gave local governments an incentive to grant building licenses that led to urban sprawl. Another objective was to reduce corruption and other illegal practices at the local level. Finally, the reform aimed at increasing equity by correcting flaws in the previous 1998 Local Finance Law, which were seen as favouring small municipalities over larger ones.

  • Spain: Reforming the funding of Autonomous Communities

    When it was created in the 1980s, the Spanish system of financing Autonomous Communities (AC) provided for a renegotiation every five years. Each round of negotiation raised political tensions and subjected the central government to additional costs for reaching an agreement. The AC finance law (LOFCA: Ley Orgánica de Financiación de las Comunidades Autónomas) adopted in 2001 was supposed to remain in force indefinitely and thus to avoid such problems. However, since it did not include mechanisms to adapt to asymmetric shocks (such as uneven population increases across regions), it was criticised for generating inefficiencies and inequities in revenue allocation. After only a couple of years, the need to reform the system became apparent. Preliminary studies were undertaken between 2006 and 2008, negotiations were carried out in 2008 and 2009 between the central government and the ACs, and in December 2009, a new LOFCA was passed by the national parliament and subsequently ratified by all the ACs ().

  • Switzerland: The new fiscal equalisation and responsability assignment framework

    Between 2003 and 2007, Switzerland passed a set of constitutional and legal amendments following a popular vote that substantially changed fiscal relations between the federation and the cantons (states). The reform objectives were to renew Swiss federalism, giving cantons more autonomy over a number of policy areas, while achieving a better balance between rich and poor cantons and better collaboration in service delivery across cantonal borders. The reform had several elements. It aimed at i) disentangling a number of policy areas that had been jointly funded and regulated by the federal and cantonal level, ii) introducing a horizontal and vertical equalisation fund to equalise taxraising capacity and public service cost across cantons, iii) obliging cantons to collaborate in public service provision, and iv) introducing new management techniques in the remaining joint tasks (Box 11.1).

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