Session Two B: Recent Developments In Intergovernmental Relations, Meeting 2019

Federal Department of Finance FDF
Federal Finance Administration FFA
Item II Session b:
Recent Developments in
Intergovernmental Relations
December 2, 2019
Werner Weber
Swiss Federal Finance Administration

2
Introduction
• Literature on fiscal federalism: Decentralisation => positive
impact on aggregate welfare (SCGs are closer to citizens)
• In practise: multidimensional trade-offs => complex
intergovernmental fiscal frameworks (e.g. economies of scale
vs. catering for local preferences)
• Decentralisation => interaction of competition, co-operation
and solidarity
• OECD of best practises => summarizes key results regarding
fiscal federalism over past 15 years
• OECD Paper => comparison of fiscal equalization systems
based on survey 2019
• Comments from a Swiss perspective

3
Fiscal Federalism Framework: Reslult
of Interaction of 3 Key Factors
Intergovernmental
Framework
Competition
Solidarity
Co-
operation

4
Three Types of Recommendations
(Best Practices)
• “Fiscal Autonomy” recommendations:
- strengthening of taxing and spending power
- aligning own-source revenues to spending
- strengthening fiscal equalisation
• “Delineation” recommendations:
- assigning tasks and responsibilities clearly
• “Co-ordination” recommendations:
- enhancing intergovernmental relations
- improving transparence
- monitoring and evaluating performance

5
Fiscal Decentralisation
Two components of decentralisation:
• Revenue side: tax autonomy => leeway of SCG over tax
policy (tax rate and base, tax reliefs)
• Expenditure side: spending power => level of control over
spending (input and output of service provision,
multidimensional approach)
Challenge: Bringing together tax autonomy and spending power
to curb vertical fiscal imbalances

6
Decentralisation Ratios 2016:
Spending more Decentralised than
Revenue
AUT
BEL
CAN
CZE
DNK
EST
FIN
FRA
DEU
GRC
HUN
ISL
IRL
ISR
ITA KORLVA
LUX
MEX
NLD
NOR
POL
PRT
SVK
SLV
ESP
SWE
CHE
GBR
USA
0
10
20
30
40
50
60
70
0 10 20 30 40 50 60 70
Sub-national spending in % of total government spending
Sub-national revenue in % of total government
Tax decentralisation >
spending decentralisation

7
Decentralisation Ratios: Change 1995-
2016
AUT
BEL
CAN
CZE
DNK
EST
FIN
FRA
DEU
GRC
HUN
ISL
ISR
ITA
LVA
LUX
MEX
NLD
NOR
POL
PRT
SVK
SLV
ESP
SWE
CHE
GBR
USA
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
-15.00 -10.00 -5.00 0.00 5.00 10.00 15.00
Change in expenditure share, % points
Change in sub-national revenue share

8
Trade-offs for Fiscal Decentralisation
• Taking account local preferences vs. economies of scale
• Increasing information costs for central gvt => more complex
co-ordination and monitoring
• Incentives problems in the areas of
- tax sharing arrangements (to cover vertical imbalances)
- earmarked transfers
- design of fiscal equalisation scheme
• Non-linear effects of fiscal decentralisation (inflection point):
diminishing marginal effects

9
Empirical Results
Growth
• Mixed effects of decentralisation on growth: several channels
with positive/negative impact
• OECD: positive relationship between revenue decentralisation
and growth; weaker effect on spending side
• However, country-specific circumstances are an important
caveat
Inequality
• Some indication that decentralization reduces inequality

10
A Synthesis of Best Practices
• Role of grants and transfers: transfer dependence is
problematic (=> reduce earmarked transfers and revenue
sharing); appropriate design of equalisation transfers
• Strengthening own-source revenue to replace grants: e.g.
increase role of property tax on SCG-level
• Fiscal equalisation as the “natural companion of fiscal
autonomy”: should be based on potential revenue; incentive
issues for recipient SCGs; policy neutrality
• Raising SCG spending power: adapting to local preferences
and reinforcing connection between local taxes and service
provision

11
Swiss Experience: Own-source
Revenue
Year: 2015; References: Federal Finance Administration

12
Assignment of Responsibilities
• Fragmented and overlapping responsibilities are a frequent
concern: clearly assigning tasks and responsibilities may be the
obvious advice; however in practice things are complex (shared
functions such as regulating, financing, monitoring)
• Mismatch between spending shares and spending power may
suggest a delineation problem
• Assignment criteria needed: OECD formulates 10 guidelines;
principles of subsidiarity and fiscal equivalence may provide a general
framework
• Reducing earmarked co-funding: assigning clearly responsibilities
and correcting fiscal inequality with equalisation
• Scope for reducing vertical and horizontal fragmentation may be
limited: e.g. in complex areas such as health, education, social
welfare => need for co-operation (vertical and horizontal)

13
• Subsidiarity Every task shall be carried out at the lowest level
possible.
• Fiscal equivalence
Beneficiary
Tax payerDecision-
maker
Swiss Experience: Guiding Principles
for the Legislator

14
Swiss Experience: Reforming
Assignment of Tasks
• Encompassing Reform in 2008: disentanglement of tasks =>
reduction of ear-marked transfers
• Inherent trend towards centralisation => direct democracy
increases tasks of central gvt and overlapping responsibilities
• New project for disentanglement in 2020: social welfare,
regional transportation (without health care, education)
• Budget neutrality between central government and cantons:
financial impact of the reform to be compensated

15
Confederation
Cantons
Communes
Swiss Experience: Vertical
Cooperation
• National tasks: administrative implementation by cantons
• “Shared tasks” (co-financing): federal government defines
strategic goals and gives enough operational leeway to cantons
(unconditional transfers)
• Solidarity between the Confederation and the cantons and
among cantons:
• Fiscal equalisation

16
Confederation
Cantons
Communes
Swiss Experience: Horizontal Co-
operation
• Intercantonal agreements: internalisation of spillover effects
 760 inter-cantonal treaties (“concordats”)
 Declaration as generally binding by Confederation
• Intercantonal institutions: policy coordination between cantons
 16 conferences of cantonal directors (cantonal ministers) and
conference of the cantonal governments
• Solidarity between the cantons: Fiscal equalisation is co-financed
by financially strong cantons

17
Update of Best Practices in Fiscal
Equalisation
• Policy neutrality: fiscal policy choices of an SCG should not
influence fiscal equalisation entitlements
• Revenue equalisation should be based on measurement of
potential revenue (fiscal capacity) using an average tax rate
(representative tax system)
• Cost-based equalisation should not increase inequality; it
should be based on standard or average costs
• Design of equalisation schemes: they should rely on a few
core indicators, which cannot be influenced by SCGs
• Adequate mix of vertical and horizontal equalisation:
horizontal equalisation more powerful regarding redistribution

18
Swiss Experience: Reforming Fiscal
Equalisation
• Revenue equalising (80% of total) and cost equalising
scheme (15% of total)
• Revenue equalisation based on potential revenue (effective
revenue/tax rates not taken into account)
• Cost equalization based on 9 indicators
• Goal of revenue equalisation: 85% of national average
• Reform 2020: increased goal 86.5%; more rule-based system
• Challenges:
- weak incentives for recipients (net losses may occur if canton
increases potential)
- amount for revenue equalisation is endogenous => potential
budgetary risk

19
Thank you for your attention!

Session Two B: Recent Developments In Intergovernmental Relations, Meeting 2019

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Session Two B: Recent Developments In Intergovernmental Relations, Meeting 2019