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 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

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 Growth in expenditure and growth in revenue Tax revenues and grants 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 years, with the exception of the federal states  The creation of regional systems is a sa feature (their diffusion is a reflection of the demand for decentralisation)  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) 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 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 non- tax 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 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 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 non- progressive local tax system and an effective grant system   Italy has high degree of regional income disparity (like Croatia) 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 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 Higher costs of service provision, due to the non-exploitation of economies of scale Provision of a smaller range of services 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 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 mono- functional governments for urban and/or mixed urban and rural areas) 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 mono- functional governments for urban and/or mixed urban and rural areas) Note: Cooperation can be fostered by appropriate grants systems, as demonstrated in France