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If the sub-national fiscal autonomy is limited, there
is no great need for rules of borrowing (Table 2,
col. 3); “ministerial approval” is then quite simply
the rule. In most other countries, such rules are
regarded as necessary. Most often the “golden
rule” is prescribed, which means that borrowing is
allowed up to the level of public investment undertaken in that period. But in several countries no
such restrictions exist (e.g., Canada for the
provinces and the territories, U.S., Norway, the
Netherlands).
MACROECONOMIC
MANAGEMENT OF
DECENTRALISED FISCAL
DECISIONS
Sub-national public spending as a percentage of
total government spending differs widely between
countries (Table 1), ranging between 5 percent
(Greece) and 57.8 percent (Denmark). A relatively low level of sub-national spending can be
observed, apart from Greece, also in Portugal, Luxembourg and France. All other countries spend at
least a quarter of public expenditures at the subnational level (United Kingdom: 25.9 percent).
Interestingly, some countries with unitary governmental systems (Denmark, Japan and Sweden)
spend even more at sub-national levels than the
average of the federally organised countries, which
stands at 39.0 percent. Thus, in most countries subnational public spending accounts for a considerable part of total government spending. This leads
to the question of how macroeconomic management is performed in order to secure overall fiscal
discipline.
Compliance with overall macroeconomic policy or,
at least, securing sub-national financial stability
and sustainability must be enforced in some way
(Table 2, col. 4). Fiscal behaviour might be disciplined by market forces (interest rate and rating of
the bonds issued), which can be additionally
strengthened by the national level giving no guarantees for sub-national borrowing (Canada, U.S.,
Sweden, Finland). An alternative is to put administrative or financial sanctions on the sub-national
unit that misbehaves. This instrument is used by
most countries to enforce compliance. A third way
of enforcement is the so-called “peer pressure”
which means that countries have incentives to orientate their fiscal behaviour on fellow sub-national units that have better balanced budgets or at
least correspond to the average of the others’ bud-
The design of rules to control the fiscal behaviour
of sub-national government levels in order to make
them comply with the overall macroeconomic policy shows large differences between countries
(Table 2, col. 2). The general type of co-ordination
ranges from “limited fiscal autonomy” (i.e., no
need for co-ordination), to “no formal co-ordination” (i.e., with a substantial degree of fiscal autonomy), to a “balanced-budget rule” and finally to a
“co-operative approach”.
Table 1
Sub-national public spending as a percent of
general government spending, 2001
Federal countries
Canada
United States
Germany
Belgium
Austria
Average
In some countries, such as Sweden and Finland, it
appears sufficient to prescribe the balanced budget
rule (with a certain leeway to carry-over deficits
and surpluses) and to pose no explicit restrictions
on borrowing. A co-operative approach is followed
by three federal countries (Germany, Belgium,
Austria) and by two unitary countries (Denmark
and the Netherlands). In most cases, such an
approach means that a domestic stability pact is
established. No formal co-ordination can only be
observed in federal states, while several of the unitary countries provide their sub-national levels
only with limited fiscal autonomy, evading the
problem that sub-national levels might disturb
national macroeconomic targets.
56.5
40.0
36,1
34.0
28.5
39.0
Unitary countries
Denmark
Sweden
Japan
Norway
Finland
Netherlands
Spain
Italy
Ireland
United Kingdom
France
Portugal
Luxembourg
Greece
57.8
43.4
40.7
38.8
35.5
34.2
32.2
29.7
29.5
25.9
18.6
12.8
12.8
5.0
Average
29.8
Source: OECD, Economic Outlook, 74, 2/2003, p. 145
(adapted).
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CESifo DICE Report 1/2004
Database
Table 2
Macroeconomic management of sub-national fiscal behaviour
Country
Type of co-ordination
Rules for borrowing
Enforcement
Canada
No formal co-ordination, but
balanced-budget constraints
No restrictions for
provinces and territories;
golden rule for
municipalities; carry-over
of surpluses to next year
Market discipline;
administrative sanctions;
no government guarantee
United States
No formal co-ordination, but
balanced budget constraints
No restrictions
Market discipline; no
government guarantee
Germany
Co-operative approach; domestic
stability pact
Golden rule for most
Länder and municipalities
Peer pressure exerted by
the Financial Planning
Council
Belgium
Co-operative approach; targets
for expenditure growth
On approval by central
government
Peer pressure and
administrative sanctions
Austria
Co-operative approach; domestic
stability pact
No restrictions for Länder;
municipal borrowing
regulated by the Länder.
Peer pressure and
financial sanctions (fines)
Federal countries
Unitary countries
Denmark
Co-operative approach, formal
co-operation between levels
Ceiling for long-term
borrowing; Golden rule
for municipalities
No restrictions
Peer pressure and
financial sanctions
Sweden
Balanced-budget-rule with twoyear carry-over
Japan
Limited fiscal autonomy
Defined by annual Local
Government Fiscal Plan
Administrative sanctions
Norway
Ex-ante operating deficits not
allowed; carry-over of ex-post
deficits for two years
No restrictions
Administrative sanctions
Finland
Balanced-budget constraint over
the medium term
No explicit restrictions, no
guarantee
No sanctions
Netherlands
Co-operative approach; balancebudget rule on accrual basis
No restrictions
Administrative sanctions
Spain
Balanced-budget constraint for all
levels
Golden rule
Administrative sanctions
Italy
Domestic Stability Pact sets
ceilings on primary deficit
Golden rule
Peer pressure and
financial sanctions
Irleand
Limited fiscal autonomy;
balanced-budget constraint
Ministerial approval
Administrative sanctions
No sanctions
United Kingdom
Limited fiscal autonomy
Ministerial approval
n.a.
France
Operating deficits not allowed
Golden rule
Administrative sanctions
Portugal
n.a.
n.a.
n.a.
Luxembourg
Limited fiscal autonomy;
operating deficits not allowed for
municipalities
Ministerial approval for
loans above a threshold
Administrative sanctions
Greece
Limited fiscal autonomy
Ministerial approval
n.a.
Source: OECD, Economic Outlook, 74, 2/2003, p. 157–8 (adapted).
But there is a difficulty to design the rules of subnational fiscal behaviour in a way that they induce
the correct responses in each possible situation.
The balanced-budget regulations in place in many
countries seem to bear the danger of pro-cyclicality. This leads some national governments in times
of need to adjust the expenditure possibility of
sub-national units by additional or reduced grants
and transfers.
R. O.
gets. It is typically the countries with a co-operative
approach who use the peer pressure mechanism.
However, peer pressure is generally combined with
some type of sanction.
Compliance with overall macroeconomic targets
might, more often than not, mean that sub-national expenditure and borrowing must be constrained.
But sometimes, for example, during a businesscycle downswing, the contrary might be desirable.
CESifo DICE Report 1/2004
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