Almost 35% of public money is spent at the sub-national government level. State and local governments shape education, healthcare, infrastructure and other key policy areas, affecting productivity and the sustainability of public finances. The funding of public services through taxes and transfers is not only a key determinant of a country’s growth, but most importantly it is a critical driver for the advancement of the well-being of its citizens.

This 2016 edition of Fiscal Federalism seeks to analyse and propose reform options in the area of intergovernmental fiscal frameworks and sub-central public finance. The policy issues that it addresses are of a structural and macroeconomic nature, covering both the spending and the revenue sides of the budget. After an introductory chapter summarising trends and developments in decentralisation since 1995, the book goes on to examine:

This chapter offers a succinct overview of fiscal decentralisation in OECD countries and identifies common trends. To that end, it seeks to answer a few crucial questions. How does decentralisation evolve overall? Which countries have undertaken intergovernmental fiscal reforms, and which were the most common and important? What was the impact of the 2008 crisis on sub-central deficits and debt? How did sub-central power and responsibilities evolve in the aftermath of the crisis? Is there a “new normal” in intergovernmental fiscal relations and sub-national public finance, and what does it look like? To answer these questions, the chapter reviews the evolution of the main fiscal indicators, such as spending and revenue decentralisation, tax autonomy, the tax and spending composition of sub-central governments, the size and structure of the intergovernmental grant system, and deficit and debt developments at the sub-national level. Finally, the chapter looks beyond purely financial decentralisation indicators.

Fiscal constitutions comprise the sets of rules and frameworks that guide a country’s fiscal policy and are enshrined in its fundamental laws. This chapter compares the fiscal constitutions of 15 federal countries by empirically assessing frameworks of intergovernmental relations. It looks at such aspects as the responsibility of sub-national governments for their own policies, their power to shape fiscal policy at the federal level, the strength of intergovernmental budget frameworks, and the stability of fiscal policy arrangements. The chapter also gives a detailed account of how fiscal constitutions evolved between 1917 and 2012, describes historical turning points, and identifies potential drivers of constitutional reform. It then assesses the link between constitutional frameworks and fiscal outcomes, suggesting that the coherence of constitutional arrangements – i.e. the way in which fiscal constitution elements and building blocks fit together – is a crucial factor in the long-term sustainability of public finances. Finally, the chapter suggests a number of policy reform options for making fiscal constitutions more coherent.

Ancient civilisations taxed land and property for thousands of years – long before they discovered income, business or consumption taxes. More recently, policy makers have again become enthusiastic about this oldest of taxes and immovable property taxation has returned to the fore. This chapter surveys and evaluates immovable property tax policy in the OECD. The first section shows main property tax trends and developments. Section 2 surveys and evaluates property tax regimes currently in place in OECD countries. Section 3 analyses the economic impact of property taxation on, for example, investment and growth, income distribution, macroeconomic stability and revenue buoyancy and, finally, on land use. Section 4 reviews the relationship between property taxation and intergovernmental relations. Section 5 presents an alternative to property taxation, namely the taxation of imputed rent as part of income taxation. The sixth and final section deals with the political economy of property taxation and how to make property tax reforms happen.

Sub-central governments (SCGs) have two main revenue sources: own taxes and grants from other tiers of government. Both revenue sources help finance sub-central public expenditure, but differ in the way they are generated and distributed. As a result, the sub-central revenue mix is likely to shape decisions at all levels of government about how, when and on what to spend money. This chapter presents the policy issues and trade-offs for both central and sub-central governments as they seek to strike a balance between own taxes and grants. The first section shows how the make-up of sub-central revenues has evolved from country to country. The second section explores the advantages of own sub-central taxation, while the third section makes the case for intergovernmental transfers. As for the fourth section, it puts forward policy options for improving the balance between taxes and grants.

OECD-wide, sub-central government debt accounted for 13% of GDP and 17% of total public debt in 2013. This chapter begins by examining the main drivers of sub-central government debt, explains why it is important to monitor debt, and surveys monitoring practices in OECD countries. The chapter then goes on to explore the main challenges that governments face when they design monitoring mechanisms and identifies policy options. The chapter explores in detail how mechanisms to monitor sub-central government borrowing – e.g. fiscal rules or direct control – work in OECD countries. It also provides an overview of data requirements and accounting procedures at all levels of government. Finally, it considers insolvency procedures and other mechanisms for dealing with sub-central governments in financial distress. The chapter draws on an OECD Fiscal Network survey of sub-central fiscal rules and macroeconomic management conducted in 2013.

A common way to compare and assess sub-central spending power – defined as the extent of control that sub-central governments exert over the budget – is the share of sub-central in general government expenditure. Yet upper-level government regulation can powerfully shape sub-central spending and jurisdictions may lose their discretionary power over various budget items. This chapter provides evidence of sub-central jurisdictions’ restricted power over their own spending and of the potentially negative effects on public service efficiency. It then goes on to develop a novel approach for measuring true sub-central spending power and looks at the results of a pilot study carried out in a number of countries in 2009. The new approach might be extended to all OECD countries in the future, thereby helping to re-design the assignment of spending responsibility across all tiers of government.