Workshop on “Decentralisation: trends, perspectives and issues at the threshold of EU

enlargement”Copenhagen, October 10-11, 2002

Fiscal Design across Levels of Fiscal Design across Levels of Government: Government: EU Applicant States and EU EU Applicant States and EU Member States Member States

By Jeffrey OwensBy Jeffrey Owens

Head Head

Centre for Tax Policy & AdministrationCentre for Tax Policy & Administration

OECDOECD

Slide no. 2

Main TopicsMain Topics

I. Accession: opportunities & challengesI. Accession: opportunities & challenges

II. Fiscal decentralisation: main findings II. Fiscal decentralisation: main findings of the OECD- CTPA Surveysof the OECD- CTPA Surveys

III. Some general conclusions and III. Some general conclusions and perspectivesperspectives

Slide no. 3

Current and Prospective Current and Prospective EU MembersEU Members

Current EU MembersProspective EU Members

Slide no. 4

GDP per headGDP per head

GDP per head

0

5000

10000

15000

20000

25000

Mean 1

5 E

U m

em

ber

Sta

tes

Mean 1

3 A

pplic

ants

Sta

tes

Bulg

aria

Cypru

s

Czech R

epublic

Esto

nia

Hungary

Latv

ia

Lith

uania

Malta

Pola

nd

Rom

ania

Slo

vak R

epublic

Slo

venia

Turk

ey

GDP per head

Slide no. 5

Key IndicatorsKey IndicatorsPopulation

(in 1000)Size (km2)

Growth Inflation rate

Public deficit

(% GDP)

Public debt (% GDP)

Bulgaria* 8,170 110,971 4.00 10.3 -0.7 76.9Cyprus 757 9,251 4.00 4.9 -3.2 63Czech Republic 10,273 78,866 3.30 3.9 -4.2 17.3Estonia 1,436 45,227 5.00 3.9 -0.7 5.3Hungary 10,024 93,030 3.80 10 -3.1 55.7Latvia 2,373 64,589 5.90 2.6 -2.7 14.1Lithuania 3,696 65,300 7.70 0.9 -3.3 23.7Malta 391 316 -0.80 2.4 -6.6 60.6Poland 38,646 312,685 1.10 10.1 -3.5 40.9Romania* 22,435 238,391 5.30 45.7 -3.8 22.9Slovak Republic 5,401 49,035 3.30 12.1 -6.7 32.4Slovenia 1,990 20,273 3.00 8.9 -2.3 25.8Turkey* 65,293 769,604 -7.40 54.9 -11 57.8

Weighted average 10 Applicant States 2.54 8.45 -3.67 36.58Weighted average 15 Member States 1.50 2.30 -0.60 63.00

Slide no. 6

I. Accession: opportunities I. Accession: opportunities & challenges& challenges

Accession will fundamentally change the Accession will fundamentally change the nature of the European Union:nature of the European Union:– Frontiers will move to the EastFrontiers will move to the East– The new Union will be confronted with a The new Union will be confronted with a

greater economic diversitygreater economic diversity– The experience of Germany suggests this The experience of Germany suggests this

will be an expensive and difficult will be an expensive and difficult integrationintegration

Slide no. 7

I. Accession: opportunities I. Accession: opportunities & challenges& challenges

But it will fulfill the vision of the founder of But it will fulfill the vision of the founder of the Community:the Community:– to build a truly integrated Unionto build a truly integrated Union– with markets and skills that can match the with markets and skills that can match the

United StatesUnited States– and with the economic and political weight and with the economic and political weight

to make its voice heard on the global stageto make its voice heard on the global stage Realising this vision is the business of all Realising this vision is the business of all

levels of governmentlevels of government

Slide no. 8

What are the new What are the new opportunities?opportunities?

Continuing the process of promoting local Continuing the process of promoting local democracydemocracy

drawing upon the experience of EU drawing upon the experience of EU Countries that have long histories of Countries that have long histories of decentralised governmentdecentralised government

Tapping into a wider pool of experimentationTapping into a wider pool of experimentation Accessing resources available in BrusselsAccessing resources available in Brussels Helping the expanded community to stay in Helping the expanded community to stay in

touch with citizenstouch with citizens

Slide no. 9

What are the new What are the new challenges?challenges?

Meeting the Stability Pact requirementsMeeting the Stability Pact requirements Meeting the State Aid RulesMeeting the State Aid Rules Financing implementation of EU Financing implementation of EU

DirectivesDirectives Central government squeezed between Central government squeezed between

higher & lower levelshigher & lower levels Making sure the voice of local Making sure the voice of local

government is heard in Brusselsgovernment is heard in Brussels

Slide no. 1

0

II Main findingsII Main findings

Current approaches to sub-national Current approaches to sub-national government within the EUgovernment within the EU– Federal approach (Austria, Germany, Federal approach (Austria, Germany,

Belgium)Belgium)– Tradition of relatively strong sub-national Tradition of relatively strong sub-national

government (Denmark, Finland, Sweden)government (Denmark, Finland, Sweden)– Tradition of relatively weak sub-national Tradition of relatively weak sub-national

government (Greece, Ireland, Portugal)government (Greece, Ireland, Portugal)– Intermediate approach (France, Italy, Intermediate approach (France, Italy,

Luxembourg, Netherlands, Spain, UK)Luxembourg, Netherlands, Spain, UK)

Slide no. 1

1

Current approaches to sub-national Current approaches to sub-national government in 10 Applicant government in 10 Applicant CountriesCountries

Unitary approachUnitary approach Four countries with genuine regional Four countries with genuine regional

level (Czech Republic, Latvia, Poland, level (Czech Republic, Latvia, Poland, Slovak Republic)Slovak Republic)

Only two countries with two tiers of local Only two countries with two tiers of local government (Latvia, Poland) government (Latvia, Poland)

Slide no. 1

2

Bulg

aria

Czech R

epublic

Esto

nia

Hungary

Latv

ia

Lith

uania

Pola

nd

Rom

ania

Slo

vak R

epublic

Slo

venia

Under 10001000-2000

2000-50005000-10000

10000-5000050000-100000

Over 100000

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

% o

f au

tho

riti

es

Population ofauthority

Bulg

aria

Czech R

epublic

Esto

nia

Hungary

Latv

ia

Lith

uania

Pola

nd

Rom

ania

Slo

vak R

epublic

Slo

venia

Under 10001000-2000

2000-50005000-10000

10000-5000050000-100000

Over 100000

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

% o

f au

tho

riti

es

Population ofauthority

Distribution of Distribution of municipalities by size municipalities by size rangerange

Slide no. 1

3

Decentralisation profiles Decentralisation profiles Sub-national expenditure levels Sub-national expenditure levels (% of (% of GDP)GDP)

0.05.0

10.015.020.025.030.035.0

Slide no. 1

4

Decentralisation profiles Decentralisation profiles Sub-national revenue Sub-national revenue levelslevels

%GDP

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

%GDP % total revenue

Slide no. 1

5

The allocation of The allocation of responsibilities responsibilities

(sub-national spending by function as a percentage of (sub-national spending by function as a percentage of total sub-national spending. Mean values)total sub-national spending. Mean values)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Ge

n. p

ub

.se

rvic

es

Ed

uca

tion

He

alth

We

lfare

Ho

usi

ng

Cu

lture

Tra

nsp

ort

Oth

ers

ApplicantStates

SelectedmemberStates

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Ge

n. p

ub

.se

rvic

es

Ed

uca

tion

He

alth

We

lfare

Ho

usi

ng

Cu

lture

Tra

nsp

ort

Oth

ers

ApplicantStates

SelectedmemberStates

Slide no. 1

6

Composition of sub-Composition of sub-national revenuesnational revenues

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bul

garia

Cze

ch R

epub

lic

Est

onia

Hun

gary

Latv

ia

Lith

uani

a

Pol

and

Rom

ania

Slo

vak

Rep

ublic

Slo

veni

a

Bel

gium

Den

mar

k

Fra

nce

Italy

Net

herla

nds

Spa

in

Sw

eden

Uni

ted

Kin

gdom

Grants

Non-tax revenues

Tax revenues

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bul

garia

Cze

ch R

epub

lic

Est

onia

Hun

gary

Latv

ia

Lith

uani

a

Pol

and

Rom

ania

Slo

vak

Rep

ublic

Slo

veni

a

Bel

gium

Den

mar

k

Fra

nce

Italy

Net

herla

nds

Spa

in

Sw

eden

Uni

ted

Kin

gdom

Grants

Non-tax revenues

Tax revenues

Slide no. 1

7

0%

20%

40%

60%

80%

100%

Income and profits Property Goods and services Others

0%

20%

40%

60%

80%

100%

Income and profits Property Goods and services Others

The choice of sub-national The choice of sub-national taxestaxes

Slide no. 1

8

Local tax autonomyLocal tax autonomy

Revenue sharing where the CG:SNG revenue split…Level Sub-nationalgovernment taxesas % of total tax

revenue

SNG setstaxrate

and base

SNG setstax rate

only

SNGsetstax

baseonly

…is setby SNG

…can bechanged only if

SNG agree

…is set in legis-lationand may be changed

uni-laterally by CG

…is set annuallyby CG as part of

the budget

CG setsboth rateand taxbase ofSNG tax

Total

(a) (b) (c) (d1) (d2) (d3) (d4) (e)

Bulgaria (2000) Local 10.0 - - - - - 39.0 61.0 -100.0

Czech Republic (1999) Local 11.1 2.7 5.6 - - - 91.7 - - 100.0Estonia (1999) Local 16.2 - 9.2 - - - 90.8 - - 100.0

Hungary (1999) Local 10.4 49.2 - - - - - 50.8 100.0Latvia (1999) Local 17.1 - - - - - - - 100.0 100.0

Lithuania (1999) Local 22.0 - - - - - - - 100.0 100.0Poland (1999) Local 8.3 - 41.9 0.6 - - 57.6 - - 100.0

Romania (2000) Local 10.5 - 6.0 0.6 - - - 75.0 18.4 100.0Slovak Republic (2000) Local 4.0 7.0 28.2 - - - - 64.8 - 100.0

Slovenia (2000) Local 7.9 16.7 0.6 0.4 - - 82.3 - - 100.0Mean (by country) - 11.8 7.6 9.2 0.2 0.0 0.0 36.1 25.2 21.8 100.0

Belgium (1995) Local 6.0 13.0 84.0 - - - 2.0 1.0 - 100.0Communities 13.0 - 3.0 - - 97.0 - - - 100.0Regional 10.0 8.0 92.0 - - - - - - 100.0

Denmark (1995) Municipalities 22.0 - 96.0 - - - 4.0 - - 100.0Counties 9.0 - 93.0 - - - - - 7.0 100.0

Netherlands (1995) Municipalities 1.0 - 100.0 - - - - - - 100.0Polder boards 1.0 - 100.0 - - - - - - 100.0

Spain (1995) Local 9.0 33.0 51.0 - - 16.0 - - - 100.0Regions 5.0 15.0 7.0 - - 78.0 - - - 100.0

Sweden (1995) Municipalities 22.0 4.0 96.0 - - - - - - 100.0Counties 11.0 - 100.0 - - - - - - 100.0

United Kingdom (1995) Local 4.0 - 100.0 - - - - - - 100.0Mean (by tier) - 9.4 6.1 76.8 0.0 0.0 15.9 0.5 0.1 0.6 100.0

Revenue sharing where the CG:SNG revenue split…Level Sub-nationalgovernment taxesas % of total tax

revenue

SNG setstaxrate

and base

SNG setstax rate

only

SNGsetstax

baseonly

…is setby SNG

…can bechanged only if

SNG agree

…is set in legis-lationand may be changed

uni-laterally by CG

…is set annuallyby CG as part of

the budget

CG setsboth rateand taxbase ofSNG tax

Total

(a) (b) (c) (d1) (d2) (d3) (d4) (e)

Bulgaria (2000) Local 10.0 - - - - - 39.0 61.0 -100.0

Czech Republic (1999) Local 11.1 2.7 5.6 - - - 91.7 - - 100.0Estonia (1999) Local 16.2 - 9.2 - - - 90.8 - - 100.0

Hungary (1999) Local 10.4 49.2 - - - - - 50.8 100.0Latvia (1999) Local 17.1 - - - - - - - 100.0 100.0

Lithuania (1999) Local 22.0 - - - - - - - 100.0 100.0Poland (1999) Local 8.3 - 41.9 0.6 - - 57.6 - - 100.0

Romania (2000) Local 10.5 - 6.0 0.6 - - - 75.0 18.4 100.0Slovak Republic (2000) Local 4.0 7.0 28.2 - - - - 64.8 - 100.0

Slovenia (2000) Local 7.9 16.7 0.6 0.4 - - 82.3 - - 100.0Mean (by country) - 11.8 7.6 9.2 0.2 0.0 0.0 36.1 25.2 21.8 100.0

Belgium (1995) Local 6.0 13.0 84.0 - - - 2.0 1.0 - 100.0Communities 13.0 - 3.0 - - 97.0 - - - 100.0Regional 10.0 8.0 92.0 - - - - - - 100.0

Denmark (1995) Municipalities 22.0 - 96.0 - - - 4.0 - - 100.0Counties 9.0 - 93.0 - - - - - 7.0 100.0

Netherlands (1995) Municipalities 1.0 - 100.0 - - - - - - 100.0Polder boards 1.0 - 100.0 - - - - - - 100.0

Spain (1995) Local 9.0 33.0 51.0 - - 16.0 - - - 100.0Regions 5.0 15.0 7.0 - - 78.0 - - - 100.0

Sweden (1995) Municipalities 22.0 4.0 96.0 - - - - - - 100.0Counties 11.0 - 100.0 - - - - - - 100.0

United Kingdom (1995) Local 4.0 - 100.0 - - - - - - 100.0Mean (by tier) - 9.4 6.1 76.8 0.0 0.0 15.9 0.5 0.1 0.6 100.0

Slide no. 1

9

Free revenues and tied Free revenues and tied revenuesrevenues

0%10%20%30%40%50%60%70%80%90%

100%B

ulga

ria

Cze

ch R

epub

lic

Est

onia

Hun

gary

Latv

ia

Lith

uani

a

Pol

and

Rom

ania

Slo

vak

Rep

ublic

Slo

veni

a

Mea

n

Tied revenues (specif ic grants)

Other free revenues (general grants and tax categories d-e)

Ow n revenue (tax categories a-c and non tax revenues)

0%10%20%30%40%50%60%70%80%90%

100%B

ulga

ria

Cze

ch R

epub

lic

Est

onia

Hun

gary

Latv

ia

Lith

uani

a

Pol

and

Rom

ania

Slo

vak

Rep

ublic

Slo

veni

a

Mea

n

Tied revenues (specif ic grants)

Other free revenues (general grants and tax categories d-e)

Ow n revenue (tax categories a-c and non tax revenues)

Slide no. 2

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III Some general III Some general conclusionsconclusions

Problem of fragmentation; too many; too smallProblem of fragmentation; too many; too small Total government spending in relation to GDP is 40% in Total government spending in relation to GDP is 40% in

applicant States (45% in EU), but the applicants applicant States (45% in EU), but the applicants decentralise much less (7% of GDP against 16%)decentralise much less (7% of GDP against 16%)

Inverse relation between degree of decentralisation and Inverse relation between degree of decentralisation and importance of tax revenue as source of sub-national importance of tax revenue as source of sub-national financefinance

Autonomy over sub-national taxes: overall lower in Autonomy over sub-national taxes: overall lower in Applicant StatesApplicant States

Institutional framework for central/local relations in the Institutional framework for central/local relations in the applicant States: emerging systems of negotiations; still applicant States: emerging systems of negotiations; still many countries have not established standard procedures many countries have not established standard procedures (e.g. on “bailouts”)(e.g. on “bailouts”)

Slide no. 2

1

What are the issues that What are the issues that Applicant States will face?Applicant States will face?

The balance between The balance between national fiscal national fiscal targets and sub-national fiscal discretiontargets and sub-national fiscal discretion– How fiscal decentralization may be How fiscal decentralization may be

coordinated with macroeconomic stability?coordinated with macroeconomic stability?– Can stabilisation agreements be Can stabilisation agreements be

developed between different levels of developed between different levels of government?government?

What possible institutional framework for What possible institutional framework for dialogue between EU and sub-national dialogue between EU and sub-national governments?governments?

Slide no. 2

2

Further perspectivesFurther perspectives

How to strengthen ties between sub-national How to strengthen ties between sub-national government in the expanded Uniongovernment in the expanded Union

Need to reexamine the role of intermediate Need to reexamine the role of intermediate governmentgovernment

Need to share experiencesNeed to share experiences and identification of and identification of “best practices” both within and outside of EU“best practices” both within and outside of EU

Need to develop reliable internationally Need to develop reliable internationally comparable statisticscomparable statistics

The OECD Forum on Fiscal Relations across The OECD Forum on Fiscal Relations across Levels of GovernmentLevels of Government