Fiscal Decentralisation Processes in the EU With Some Perspectives for Croatia Giorgio Brosio University of Torino, Italy and EU CARDS Programme for Croatia:

Fiscal Decentralisation Processes in the EU With Some Perspectives for Croatia

Giorgio Brosio University of Torino, Italy

andEU CARDS Programme for Croatia:Project on Fiscal Decentralisation

and

Gary O’CallaghanEU CARDS Programme for Croatia:Project on Fiscal Decentralisation

Presentation to Workshop onDecentralisation and Public Service Delivery

Zagreb, CroatiaJanuary 23, 2006

Brosio and O’Callaghan:Brosio and O’Callaghan: Fiscal Decentralisation Processes in the EU Fiscal Decentralisation Processes in the EU with with Some Some Perspectives for CroatiaPerspectives for Croatia

STRUCTURE OF THE PRESENTATION STRUCTURE OF THE PRESENTATION

THREE THREE MAIN THEMESMAIN THEMES::

1. Broad fiscal trends in 1. Broad fiscal trends in the EU in the EU in recent decadesrecent decades

2. Focus on revenue and equalisation2. Focus on revenue and equalisation

3. Focus on 3. Focus on the the fragmentation of local governmentfragmentation of local government

SOME (IMPORTANT) CAVEATSSOME (IMPORTANT) CAVEATS

No ideal model is suggested (it does not exist)No ideal model is suggested (it does not exist)

Rather, we stress need Rather, we stress need forfor consistency between: consistency between: Growth in expenditure and growth in revenueGrowth in expenditure and growth in revenue Tax revenues and grantsTax revenues and grants

Also, there must be a balance between the iAlso, there must be a balance between the intensity of ntensity of decentralidecentralissation and ation and the extent of the extent of reliance on small Lreliance on small Local ocal GGovernmentovernment units units


BROAD FISCAL TRENDSBROAD FISCAL TRENDS

Increased decentralisation in the EU over the past 15-20 Increased decentralisation in the EU over the past 15-20 years, with the exception of the federal years, with the exception of the federal statesstates

The cThe creation of regional systems is a sareation of regional systems is a salient feature (their feature (their diffusion is a reflection of the demand for decentralidiffusion is a reflection of the demand for decentralissation)ation)

Expansion of local expenditure has been somewhat Expansion of local expenditure has been somewhat constrained by the growth of pensions and social security constrained by the growth of pensions and social security payments (usually administered outside central and local payments (usually administered outside central and local government)government)


Chart 1. Local Governm ent Expenditure in percent of General Governm ent

28,4

31,8

37,6

53,7

34,636,7

30,6

16,1

4,0

25,6

32,6

10,3

25,022,2

28,5

34,036,1

57,8

38,8

43,4

35,5

18,6

5,0

29,7

34,2

12,8

32,2

25,9

0

10

20

30

40

50

60

70

Source: OECD 1 1985 2001

Chart 2. Local Governm ent Expenditure and Revenue in percent ofGeneral Governm ent (2001)

28,5

34,036,1

57,8

38,8

43,4

35,5

18,6

5,0

29,7

34,2

12,8

32,2

25,9

16,0

21,4

11,3

32,434,6

20,3

32,0

24,7

13,1

3,7

17,6

11,18,3

20,3

7,6

12,8

0

10

20

30

40

50

60

70

Source: OECD 1 Share in GG spending Share in GG revenues

THE THE STRUCTURE OF EXPENDITURESTRUCTURE OF EXPENDITURE

Delivery of education, social welfare andDelivery of education, social welfare and health services health services expands with decentralizationexpands with decentralization

Structure of LStructure of Local ocal GGovernmentovernment expenditure in Croatia expenditure in Croatia mirrorsmirrors that of unitary states, that of unitary states, but but withwith housing and economic housing and economic promotion being unusually importantpromotion being unusually important


Chart 3. Structure of Local Governm ent Expenditure (in percent)

0

10

20

30

40

50

60

70

80

90

100

Source: OECD 1, Istat and MOF(Hr)

Other

Housing

Social

Health

Education

General

STRUCTURE OF REVENUESTRUCTURE OF REVENUE

Major differences in degree of reliance on taxes, non-tax Major differences in degree of reliance on taxes, non-tax revenues or grants—many different modelsrevenues or grants—many different models

As degree of decentralisation increases, reliance on non-As degree of decentralisation increases, reliance on non-tax revenues diminishes and countries seem to choose tax revenues diminishes and countries seem to choose between tax-based systems or grant-based systemsbetween tax-based systems or grant-based systems

Shared taxes in Croatia are the most importantShared taxes in Croatia are the most important source of source of revenue for Lrevenue for Local ocal GGovernmentovernments, while the level of grants s, while the level of grants is relatively low by international standardsis relatively low by international standards


Chart 4. Structure of Local Governm ent Revenue (in percent)

0

10

20

30

40

50

60

70

80

Source: OECD 1 and MOF(Hr)Tax Non-tax Grants

THE THE STRUCTURE OF LOCAL TAXESSTRUCTURE OF LOCAL TAXES

Countries with Countries with a a high degree of decentralisation (such as in high degree of decentralisation (such as in Scandinavia) rely comparatively more heavily on the PIT Scandinavia) rely comparatively more heavily on the PIT

Countries with a lower degree of decentralisation rely more Countries with a lower degree of decentralisation rely more heavily on property and other taxesheavily on property and other taxes

Local surcharges on the PIT have become increasingly popularLocal surcharges on the PIT have become increasingly popular

However, countries relying on the PIT tend to apply a flat tax However, countries relying on the PIT tend to apply a flat tax rate to reduce progressivity rate to reduce progressivity inin collection and collection and minimise the minimise the resulting fiscal resulting fiscal disparities among local government unitsdisparities among local government units

Croatia is unusual: Croatia is unusual: a a low degree of decentralisation but a heavy low degree of decentralisation but a heavy reliance on the PIT (and CIT) to finance local government reliance on the PIT (and CIT) to finance local government


Chart 5. Structure of Tax Revenues (in percent)

0

10

20

30

40

50

60

70

80

90

100

Source: OECD 1 and MOF(Hr)PIT CIT Property Other

FOCUS ON EQUALISATION:FOCUS ON EQUALISATION:

REASONS FOR EQUALISATIONREASONS FOR EQUALISATION

Equalisation fosters national unityEqualisation fosters national unity—No —No area must perceive area must perceive aa disadvantage in its relations with the centredisadvantage in its relations with the centre

In Europe (at least), residence is no longer accepted as a factor In Europe (at least), residence is no longer accepted as a factor inin disparity disparity ofof access to public services access to public services

Migration of firms and individuals should not be Migration of firms and individuals should not be promptedprompted by by disparities in the levels of public services disparities in the levels of public services provided provided (net of their (net of their costs)costs)


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 non-progressive 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

0

20

40

60

80

100

0 20 40 60 80 100

Population

GD

P

Chart 8. Croatia: Lorentz Curve by County GDP

0

20

40

60

80

100

0 20 40 60 80 100

Population

GD

P

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

25

45

65

85

105

125

145

GDP Expenditure Poli. (Expenditure) Poli. (GDP)

Chart 10. Croatia: Index of per capita GDP and Operating Expenditure for Counties

0

20

40

60

80

100

120

140

160

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 County Op ExpenditurePoli. (GDP) Poli. (County Op Expenditure)

Chart 11. Italy: Index of per capita GDP and Operating Expenditure for Municipalities

25

45

65

85

105

125

145


Chart 12. Croatia: Index of per capita GDP and Operating Expenditure for Cities and Municipalities

25

45

65

85

105

125

145

165

185

205

225

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


FOCUS ON FOCUS ON FRAGMENTATIONFRAGMENTATION

Fragmentation Fragmentation traditional characteristic of local government traditional characteristic of local government in Europe but has three adverse consequences:in Europe but has three adverse consequences:

HHigher costs of service provision, due to the non-exploitation of igher costs of service provision, due to the non-exploitation of economies of scaleeconomies of scale

Provision of a smaller range of servicesProvision of a smaller range of services

MMore inequalities in service provision since disparities in fiscal ore inequalities in service provision since disparities in fiscal capacity are inversely correlated to the size of local government capacity are inversely correlated to the size of local government unitsunits

TThe more you merge units, the more you reduce disparities, he more you merge units, the more you reduce disparities, but but merging can be merging can be politically politically very difficultvery difficult


SOLUTIONS TO FRAGMENTATION IN EUROPESOLUTIONS 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. 2. Contracting out servicesContracting out services

3. 3. Contracts between government units situated at the Contracts between government units situated at the same and at different levelssame and at different levels



SOLUTIONS TO FRAGMENTATION (continued)

44. . Cooperation through the creation of specific Cooperation through the creation of specific organizations (such as associations and syndicates of organizations (such as associations and syndicates of

municipalities and other local governments) and of municipalities and other local governments) and of supra-municipal bodies (such as pluri- and mono-supra-municipal bodies (such as pluri- and mono-functional governments for urban and/or mixed functional governments for urban and/or mixed

urban urban and rural areas)and rural areas)

Note: Note: Cooperation can be fostered by appropriate Cooperation can be fostered by appropriate grants systemsgrants systems, as demonstrated in , as demonstrated in

FranceFrance

Documents

Fiscal Decentralisation Processes in the EU With Some Perspectives for Croatia Giorgio Brosio University of Torino, Italy and EU CARDS Programme for Croatia: