Fiscal Federalism in the European Union

Amedeo Fossati, Giorgio Panella

• Publisher: Routledge
• Year: 2005
• Print ISBN:
  9780415202626
• eBook ISBN:
  9781134632138
• Topic: Business
• Subtopic: Business General
• Index: Business

To what extent should local and regional governments in the European Union be allowed to determine their own fiscal policies? This book explores the core issues of fiscal federalism in the European context. It combines theoretical and empirical analysis in addressing such questions as: * what sort of fiscal federalism is appropriate in the European Community * what are the dangers of more centralization * what are the costs of greater decentralization

Part I
Europe and Fiscal federalism

1
A comparative view of local finances in EU member countries: are there any lessons to be drawn?

Giancarlo Pola

1
INTRODUCTION: ORIGIN AND SCOPE OF THE CHAPTER

This chapter draws heavily on the contents and results of a wide-ranging survey of ‘local’ finances in the 15 member countries of the European Union, which was recently carried out by myself and a group of colleagues on behalf of the EU Commission, XXI Directorate, which should be considered the real ‘owner’ of half the data presented here. A general comparative study was eventually produced by myself on the 15 contributions, the core of which is reported here, with some refinements.

In the studies the qualification ‘local’ has been applied to both the purely ‘local’ and to the ‘intermediate’ (regional) levels of government: the reasons for this choice will be given shortly. The fixed time point used as a benchmark for the comparative analysis is the year 1993: however, enquiries have usually gone back to 1980 as a starting point for the historic survey. Finally, both the revenue and (though to a smaller extent) expenditure side of budgets have been examined but within the revenue side special attention is paid to the taxation element.

During the time span under scrutiny, the control and financing of lower levels of government has been a major political issue in practically all member countries of the EU. Many countries have recently implemented reforms to the ways in which intermediate and local tiers of government are structured and financed. In some cases, these reforms are so radical and include such a reallocation of expenditure functions between levels of government as to cause a transition from a unitary to a federal (e.g. Belgium) or to a quasi-federal (e.g. Spain) constitutional setting. In other cases the changes have only concerned the means of financing, with a strengthening of the local taxation case (e.g. Italy). In yet other cases, both the financing methods and the boundaries of intermediate and local governmental units have undergone changes (e.g. the United Kingdom, Greece).

At the same time, marked changes in the general economic conditions and, as a consequence, alterations in the attitude of most European governments towards public expenditure (at all levels) have taken place. Central governments of all political colours have become increasingly concerned about their degree of control over subcentral levels of expenditure and have tried to instil the ‘virtue’ of accountability in subcentral governments. Most of the times this has been obtained through an intensification of the autonomous tax-raising powers of the lower levels of government, but also through tighter controls of their borrowing. Last but not least, European subcentral governments—like others—have been caught in, and actively involved by, the process of redistribution and ‘equalisation’ of the overall fiscal resources, both in the horizontal and in the vertical sense.

It is within such a framework that the rest of the chapter will be cast.

2
THE PATTERNS OF ORGANISATION AND DECENTRALISATION OF EXPENDITURE AT THE END OF THE PERIOD: SIMILARITIES AND DIFFERENCES

As an inevitable outcome of some centuries of highly civilised history, the 15 countries examined exhibit an intriguing variety of legal and constitutional settings with regard to their forms of government. I consider it appropriate for my purposes to adopt a classification of them which simply takes into account the number and quality of those authorities—endowed with an autonomous power of decision, normally matched by at least a minimal power of raising own revenue (mainly through taxation)—which are called decentralised levels of administration in the French tradition and levels (or tiers) of government in English terminology, which were present in the years 1993–4. Within the subcentral levels of government a distinction is usually drawn between a purely ‘local’ level and an ‘intermediate’ one. However, the term ‘intermediate’ is subject to some ambiguity, since some authors include in it the ‘provincial’ dimension (county, kreis, province, etc.) and some do not, thus aggregating the provincial level of government with the municipal one into the general ‘local’ level. In this chapter I have taken the methodological decision to consider as the ‘intermediate’ tier of government only the ‘regional’ level.

The situation around the year 1993 is depicted in Table 1.1. Separate regional governments are not present in all countries of the European Union. They exist— indeed they form the very essence of them—in the three countries with federal arrangements (Austria, Belgium, Germany). In these countries central government and regional governments share most of the power (including financial power) and responsibilities. Separate regional governments also exist in the three countries in which the Constitution envisages, and the laws have subsequently implemented, a varying degree of operating independence, responsibility and control to regional authorities (France, Italy, Spain). Here problems of interpretation are present as to what real discretion the regional government has over its own affairs, including fiscal ones. In other words, it is difficult to say in all cases what is sheer decentralisation of centrally determined administrative tasks and what is self-determination.

Table 1.1 Decentralised government in the European Union (numbers of government units at various levels).

Local governments (in one or two versions, as explained) exist throughout the 15 countries. They consist of governmental units exercising independent competence in the various urban and/or rural jurisdictions of a country’s territory. When local governmental functions are not carried out separately from the administrative structure of another government their activities can be regarded as forming part of the central or regional government to which they belong. Here again the boundary between dependence and self-determination can be very thin. In this sense the literature distinguishes between an ‘agency’ model and a ‘choice’ model for local government.¹

The ‘choice’ model is centred on the idea that decentralisation provides scope for local communities to choose different levels of local services and taxes, matching their preferences more closely than if decisions had been made by the central government. ‘Choice’ does not necessarily have to be expressed within the jurisdiction—and in this case it reflects the balance among the preferences of different groups of citizens; it can also be revealed through the mobility of people from one jurisdiction to another. In other words, ‘choice’ models stress the inherent democratic value of any process of decentralisation of power and fiscal authority.

The ‘agency’ model of local government offers a completely different perspective, since it envisages a system of local authorities simply engaged in administrative decentralisation of some of the policy functions of central government. Here the objective of decentralisation is not to ensure that levels of provision are responsive to the preferences and choices of local residents, but to exploit certain advantages of smaller-scale units in the administrative implementation of centrally determined policies.

None of the 15 European intermediate and local tiers of government seems to belong to either of the two ‘pure’ models, except perhaps in the case of the recent experiments of regional government carried out in Greece. All of the real world examples share elements of the two models in a varying degree. To make things more complicated, local government throughout Europe is made up of a wide variety of governmental units, dependent agencies, and/or activities, and may include such diverse entities as counties, municipalities, cities, towns, townships, boroughs, school districts, water or sanitation districts, combinations of contiguous local governments organised for various purposes, etc.²

In light of the above criteria, my final classification of the 15 countries from the point of view of their constitutional-organisational set-ups is the following:

1. Countries where an ‘intermediate’ level of government is active between the central and the local ones. To this category belong:
   • the genuine federal states, which in the EU number three—Austria, Belgium, Germany;
   • the unitary states exhibiting a regional level, more or less strong and ‘visible’ (France, Italy, Spain).
2. Countries where such an intermediate level is not officially present. This group includes:
   • unitary countries where local government is represented by two levels (Denmark, Great Britain, Netherlands, Sweden);
   • unitary countries where local government is set at one level only (Greece until 1994, Finland, Ireland*, Luxembourg, Portugal**) (*despite the formal presence of subcounty administrations; **if ‘parishes’ (fregueisas) are not considered fully fledged autonomous authorities).

While the reported outline refers to the current situation, it should be remembered that the picture has not always been the same during the time span covered by the enquiry (1980–1993/4). The main changes in organisation, expenditure and revenue sources of the subcentral governments in the 15 countries will form the content of a following section.

The division of functions between central government and the various layers of subcentral governments is normally regulated by the law in unitary states and by the constitution in federal ones. However, there is no universal principle defining which responsibilities should fall onto intermediate (even in the case of federal countries) or local governments. Table 1.2 collects a sample of situations in both federal and unitary countries in order to show what is the weight of the various sectors of government at the various levels in each one of the two basic institutional conditions. Two facts emerge:

1. Local government is normally more expanded in the unitary countries than in the federal ones in all sectors of activity except ‘law and order’: federal countries apparently devolve to the ‘state’ (regional) level some functions normally exercised at the local level.
2. Education, health and transport are the sectors where the decrease of central prerogatives is the highest, with the centre retaining a marginal proportion of the entire expenditure.

It is difficult to draw neat lines around the precise ‘jurisdictions’ in charge of services at subcentral levels, since joint actions and competences are often present. Yet attempts to set down classifications do exist. One of them was attached to the previously cited report (Denny, Ridge, Smith (1993): see Note 1) and has been selected for updating in this chapter (see Table 1.3). Another ambitious comparative table dealing with some 34 basic subcentral functions, albeit confined to the intermediate level of government (an enlarged version comprising also counties and provinces) is contained in the study by Owens and Norregaard (1991) (see Table 1.4).

The study by Owens and Norregaard reveals that quite outstanding differences characterise not only historically distant unitary countries like Italy and the UK, but also culturally very similar federal countries like Austria and Germany. For most of the functions the intermediate level of government has an obligation—either imposed by a higher tier of government or by the constitution—to provide the service. This, according to the authors, is not true for a large number of functions in the majority of the unitary countries studied. Finally, they have discovered that ‘in unitary countries there is no uniformity in the range of tasks performed by regional governments’: however, this conclusion is—in my view—a consequence of the enlarged concept of ‘regions’ adopted in their analysis.

Coming back to the results of my personal survey synthesised in Table 1.3, I would say that any attempt to exactly fit 15 different situations in general, abstract models (such as: ‘who performs what’) is blurred by at least three factors:

1. The distinction between ‘compulsory’ and ‘discretional’ character of the function performed or service provided at each level (the French and Italian cases come to the forefront here).
2. The widespread presence of functions or services shared among layers of government.
3. The distinction (much stressed in the Austro-German tradition, but increasingly in the Latin countries as well) between the phases which the public provision of the service undergoes. In these cases, for any given service, legislation may be within the realm (‘competence’) of the central government, administration of the regional government and provision of the local authorities.

Put in other words, the inherent rigidity of the standardisation characterising the information contained in the table does not allow it to fully reflect the variety of situations prevailing in Europe as far as the provision of services at the intermediate/local level is concerned. As a general rule, Table 1.3 confirms what is per se intuitive, i.e. that certain functions are—with some exception—always entrusted to local authorities, whatever the extension (if there is one) and role of the ‘intermediate’ level: roads maintenance, public lighting, sewage, sports facilities, parks and recreations, libraries, street cleaning, refuse collection and disposal, basic social welfare.

The information provided can only be commented on in a cursory way: for example, it can be seen that wherever the intermediate level exists, it takes care of many services which would either be left to the local tiers straightaway (this holds for federal as well as for regional governments) or retained by the central level. Particularly when the functions are wide-ranging and the services associated to them multiple, simultaneous involvement of more than one tier seems to be the rule rather than the exception. Another lesson to be drawn from the picture is that central government keeps for itself far greater room than would be expected in local matters, not only in decentralised ‘unitary’ states like the Scandinavian ones, but also in federal/regional countries. Finally, one must pay tribute to the ‘Cartesian’ efficiency of the British case, with its ad hoc solutions for each region of the country. Such an example of flexibility and pragmatism remains unrivalled in the EU.

To sum up: Table 1.3 reflects only partially the variability of the conditions under which services are rendered, in that they are tied to the specific political and economic situation of the countries. For example, the more detailed descriptions contained in the individual reports reveal that in some countries technologically complex functions—such as water or gas distribution—are, for the sake of efficiency, contracted out to private firms or controlled by boards with specialised membership. In other cases the private or collective destination of specific services (such as swimming pools) becomes important as to the inclusion of the service inside or outside the publicly funded section of the budget (this happens, for example, in Italy, France, UK).

Table 1.2 Functional distribution of public expenditure by tier of government (per cent) in a sample of OECD countries.

Furthermore, it does not come out as clearly from Table 1.3 as from the individual reports that the services which account for most of the differences in the financial burdens of subcentral governments—education, health care and welfare—appear to have different treatments and institutional placements in the various EU countries. As far as (primary) educational expenditure is concerned, the European norm (with some exceptions) appears to be that the ranning costs of the service are covered by local and intermediate governments, while wages and salaries are partially or wholly paid by central government. As regards health care expenditure, conditions vary considerably from country to country. In Italy and the United Kingdom the service is totally public and performed by special units at the regional level. A very similar model is now emerging in Spain. In France and in Germany the health care systems are half public and half private, while hospitals are run mostly at the local level. Nor does the table stress sufficiently ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Preface
• Introduction
• Part I Europe and Fiscal federalism
• Part II The state of fiscal federalism in Europe