Download Fiscal Decentralisation Processes in the EU With Some

Fiscal Decentralisation Processes in the EU
With Some Perspectives for Croatia
Giorgio Brosio
University of Torino, Italy
and
EU CARDS Programme for Croatia:
Project on Fiscal Decentralisation
and
Gary O’Callaghan
EU CARDS Programme for Croatia:
Project on Fiscal Decentralisation
Presentation to Workshop on
Decentralisation and Public Service Delivery
Zagreb, Croatia
January 23, 2006
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
STRUCTURE OF THE PRESENTATION
THREE MAIN THEMES:
1. Broad fiscal trends in the EU in recent decades
2. Focus on revenue and equalisation
3. Focus on the fragmentation of local government
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
SOME (IMPORTANT) CAVEATS

No ideal model is suggested (it does not exist)

Rather, we stress need for consistency between:
 Growth in expenditure and growth in revenue
 Tax revenues and grants

Also, there must be a balance between the intensity of
decentralisation and the extent of reliance on small Local
Government units
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
BROAD FISCAL TRENDS

Increased decentralisation in the EU over the past 15-20
years, with the exception of the federal states

The creation of regional systems is a salient feature (their
diffusion is a reflection of the demand for decentralisation)

Expansion of local expenditure has been somewhat
constrained by the growth of pensions and social security
payments (usually administered outside central and local
government)
Chart 1. Local Government Expenditure in percent of General Government
70
57,8
60
53,7
50
43,4
37,6
36,1
40
34,0
31,8
30
38,8
36,7
34,6
35,5
34,2
32,6
30,6
32,2
29,7
28,428,5
25,6
25,9
25,0
22,2
18,6
16,1
20
12,8
10,3
10
4,0
5,0
UK
Sp
ai
n
Po
rtu
ga
l
la
nd
s
Ita
ly
2001
Ne
th
er
G
1985
re
ec
e
Fi
nl
an
d
Fr
an
ce
Be
lg
iu
m
G
er
m
an
y
De
nm
ar
k
No
rw
ay
Sw
ed
en
Au
st
ria
0
Source: OECD 1
Chart 2. Local Government Expenditure and Revenue in percent of
General Government (2001)
70
57,8
60
50
43,4
38,8
40
30
34,0
36,1
35,5
34,6
32,4
34,2
32,2
32,0
29,7
28,5
25,9
24,7
21,4
20,3
20
20,3
18,6
17,6
13,1
11,3
11,1
16,0
12,8
12,8
8,3
10
5,0
7,6
3,7
Share in GG spending
Share in GG revenues
oa
tia
Cr
UK
Ita
Ne
ly
th
er
la
nd
s
Po
rtu
ga
l
Sp
ai
n
Fi
nl
an
d
Fr
an
ce
G
re
ec
e
Be
lg
iu
m
G
er
m
an
y
De
nm
ar
k
No
rw
ay
Sw
ed
en
Au
st
ria
0
Source: OECD 1
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
THE STRUCTURE OF EXPENDITURE

Delivery of education, social welfare and health services
expands with decentralization

Structure of Local Government expenditure in Croatia
mirrors that of unitary states, but with housing and economic
promotion being unusually important
Chart 3. Structure of Local Government Expenditure (in percent)
100
90
80
70
Other
60
Housing
50
Social
Health
40
Education
30
General
20
10
oa
tia
Cr
UK
Sp
ai
n
la
nd
s
Ne
th
er
Ita
ly
Fr
an
ce
Sw
ed
en
ay
No
rw
De
nm
ar
k
0
Source: OECD 1, Istat and MOF(Hr)
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
STRUCTURE OF REVENUE

Major differences in degree of reliance on taxes, non-tax
revenues or grants—many different models

As degree of decentralisation increases, reliance on nontax revenues diminishes and countries seem to choose
between tax-based systems or grant-based systems

Shared taxes in Croatia are the most important source of
revenue for Local Governments, while the level of grants
is relatively low by international standards
Chart 4. Structure of Local Government Revenue (in percent)
80
70
60
50
40
30
20
10
Tax
Non-tax
Grants
oa
tia
Cr
UK
Sp
ai
n
la
nd
s
Ne
th
er
Ita
ly
Fr
an
ce
Fi
nl
an
d
Sw
ed
en
ay
No
rw
De
nm
ar
k
0
Source: OECD 1 and MOF(Hr)
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
THE STRUCTURE OF LOCAL TAXES

Countries with a high degree of decentralisation (such as in
Scandinavia) rely comparatively more heavily on the PIT

Countries with a lower degree of decentralisation rely more
heavily on property and other taxes

Local surcharges on the PIT have become increasingly popular

However, countries relying on the PIT tend to apply a flat tax
rate to reduce progressivity in collection and minimise the
resulting fiscal disparities among local government units

Croatia is unusual: a low degree of decentralisation but a heavy
reliance on the PIT (and CIT) to finance local government
Chart 5. Structure of Tax Revenues (in percent)
100
90
80
70
60
50
40
30
20
10
PIT
CIT
Property
Other
oa
tia
Cr
UK
Sp
ai
n
Ne
th
er
la
nd
s
Ita
ly
Fr
an
ce
Fi
nl
an
d
Sw
ed
en
ay
No
rw
De
nm
ar
k
0
Source: OECD 1 and MOF(Hr)
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
FOCUS ON EQUALISATION:
REASONS FOR EQUALISATION

Equalisation fosters national unity—No area must perceive a
disadvantage in its relations with the centre

In Europe (at least), residence is no longer accepted as a factor
in disparity of access to public services

Migration of firms and individuals should not be prompted by
disparities in the levels of public services provided (net of their
costs)
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
THE POTENTIAL COSTS OF EQUALIZATION

Countries with a high degree of regional disparity will have a
larger disparity of local government revenue

In the absence of an equalisation system, there will be more
disparity in service provision

Equality of levels of service provision and/or implementation of
minimum standards require some combination of a nonprogressive local tax system and an effective grant system

Italy has high degree of regional income disparity (like Croatia)
Chart 7. Italy: Lorentz Curve by County GDP
100
80
GDP
60
40
20
0
0
20
40
60
Population
80
100
Chart 8. Croatia: Lorentz Curve by County GDP
100
80
GDP
60
40
20
0
0
20
40
60
Population
80
100
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
THE ACHIEVEMENT OF EQUALIZATION

Italy has achieved significant equalisation across regional
governments and (to lesser extent) across municipalities

Equalisation is achieved in Italy through a significant grant
system and a local property tax (which is non-progressive)

Croatia, by comparison, has achieved some degree of
equalisation across county government but cities and
municipalities display significant inequality in expenditures
Chart 9. Italy: Index of per capita GDP and Operating Expenditure for Regions
145
125
105
85
65
45
GDP
Expenditure
Poli. (Expenditure)
Poli. (GDP)
Lo
m
b
ER
Ve
ne
to
Pi
em
To
sc
La
z io
Li
g
M
ar
Um
Ab
r
M
ol
Ba
s
Pu
g
Ca
m
p
Ca
l
25
Chart 10. Croatia: Index of per capita GDP and Operating Expenditure for Counties
160
140
120
100
80
60
40
20
0
V-S B-P S-K P-S K-Z Yad S-D Zz V-P B-B O-B Md S-M D-N Kar L-S Var K-K P-G Ist
GDP
Poli. (GDP)
County Op Expenditure
Poli. (County Op Expenditure)
Chart 11. Italy: Index of per capita GDP and Operating Expenditure for
Municipalities
145
125
105
85
65
45
GDP
Expenditure
Poli. (Expenditure)
Poli. (GDP)
Lo
m
b
ER
Ve
ne
to
Pi
em
To
sc
La
z io
Li
g
M
ar
Um
Ab
r
M
ol
Ba
s
Pu
g
Ca
m
p
Ca
l
25
Chart 12. Croatia: Index of per capita GDP and Operating Expenditure for Cities and
Municipalities
225
205
185
165
145
125
105
85
65
45
25
V-S B-P S-K P-S K-Z Yad S-D Zz V-P B-B O-B Md S-M D-N Kar L-S Var K-K P-G Ist
GDP
Expenditure
Poli. (Expenditure)
Poli. (GDP)
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
FOCUS ON FRAGMENTATION

Fragmentation traditional characteristic of local government
in Europe but has three adverse consequences:




Higher costs of service provision, due to the non-exploitation of
economies of scale
Provision of a smaller range of services
More inequalities in service provision since disparities in fiscal
capacity are inversely correlated to the size of local government units
The more you merge units, the more you reduce disparities,
but merging can be politically very difficult
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
SOLUTIONS TO FRAGMENTATION IN EUROPE
1. Amalgamation (merging smaller units into a bigger one)
and consolidation: Sweden, Denmark and Great Britain
eliminated more than three-fourths of their local
governments. Belgium and Germany also restructured
their local government systems.
2. Contracting out services
3. Contracts between government units situated at the
same and at different levels
Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU
with Some Perspectives for Croatia
SOLUTIONS TO FRAGMENTATION (continued)
4.
Cooperation through the creation of specific
organizations (such as associations and syndicates of
municipalities and other local governments) and of
supra-municipal bodies (such as pluri- and monofunctional governments for urban and/or mixed urban
and rural areas)
Note: Cooperation can be fostered by appropriate
grants systems, as demonstrated in France