Intergovernmental transfers
Taxonomy, objectives and results
Empirical findings of the OECD
survey
No clear relation between fiscal
autonomy and financial decentralisation
 The gap between sub-national tax and
expenditure shares has been widening
 A high share of grants is often the result
of large horizontal imbalances (tax base
and spending needs)
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Typology of grants
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Non-earmarked
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Mandatory
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General purpose grants
Block grants
Discretionary
Earmarked
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Mandatory
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Non-matching grants
Matching grants
Discretionary
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Capital grants
Current grants
Use of grants – results of the survey
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Resources other than taxes and grants are scarce
Grants are on average 50% for states, regions and
provinces
States receive over 6% of GDP in grants (1% in
Canada to over 10% in Belgium)
Grants are on average 40% for local governments
Local governments receive on average over 4% of
GDP in grants (12.4% in Denmark, to less than 1% in
Belgium, Canada, Iceland and Turkey)
The central government is by far the most important
source of grants
In some states, international bodies are an important
source of grants
Objectives of grants
 Financing
sub-national services
and investments
 Subsidisation
 Equalisation
Objective 1: Financing
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Why choose grants over sub-national taxes?
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Central government is better able to control sub-national spending
Sub-national taxes may have distortionary effects
Sub-national taxation may lead to high inequalities
Sub-national taxes may have high administrative and collection costs
Why NOT choose grants over taxes?
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Taxes allow sub-national authorities to adapt the level of services to
local preferences
Asymmetric information and efficient allocation of resources
Taxes come with increased accountability
Sub-national authorities can’t blame grants for the poor quality of
services
Objective 1: Financing
Aims of financing grants:
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Enable sub-national authorities to
finance a basic package of services
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Best: non-earmarked general purpose grants
Provide (new) services imposed by the
central governement or reach imposed
standards
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Best: non-earmarked grants
Objective 1: Financing
Distribution criteria
 Law-based versus discretionary
 Stable and predictable versus buoyant
and evolutive
 Complex versus simple
 Based on norm costs, average costs or
actual costs?
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Objective 2 - Subsidisation
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Aim: compensate for spillover effects
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Most efficient:
National spillovers: earmarked matching
grants
 Regional spillovers: stimulation of horizontal
co-operation
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Objective 3: Equalisation
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Aim: enable sub-national governments to
provide similar services at roughly similar tax
effort
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Types
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Equalisation of tax capacity
Equalisation of service capacity (of spending
needs)
Best grants: non-earmarked general purpose
and horizontal transfers
Equalisation of tax capacity
Solidarity, but also economic reasons
(incentive to inefficient migration)
 Measure of tax capacity: revenue
collected if depleted at a certain uniform
(usually average) rate
 Caveat: full equalisation removes
incentives to increase tax base
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Equalisation of service capacity
(spending needs)
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Solidarity and regional/spatial planning (not
economic) reasons
 Reasons for inequal cost per unit of service:
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Special situation/location
Socio-demographic conditions
Requires calculation of service cost indicators
which
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Are based on average or norm costs
Cannot be influenced by sub-national authorities
Decision making
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Government is a unitary actor that maximizes the social welfare of the
nation
 But there exists:
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Critical points in grant design:
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Central-local loyalties
Assymetric information
Various forms of lobbying
Choice earmarked – non earmarked
Distribution formulas
Determining tax and service capacity and equalisation level
Discretionary grants
Efficient decision making:
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Neutral expertise
Limit the influence of lobbying
Involve sub-national governments
In a setting that encourages objective debate
Council of Europe acquis
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European Charter of Local SelfGovernment (Art. 9)
Rec(2004)1 on financial and budgetary
management at local and regional levels
 Rec(2005)1 on the financial resources of
local and regional authorities
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On-going and planned work in the
Council of Europe
Finalisation of a recommendation on the
provision of services at local and
regional levels
 A new general report on local finance in
Europe (update of a 1996 report)
 Finalisation of reports on:
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Accounting rules and practice at local level
 Performance management at local level
 Internal audit at local level
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