Fiscal Federalism policy in OECD member countries
Jon Blondal

It is a pleasure to be here today to discuss fiscal federalism issues in OECD Member countries with you. This is one of the most complex public management issues facing OECD Member countries.

I would wish to emphasize at the outset that we use the term “fiscal federalism” for convenience's sake, not because we limit ourselves to federal countries in studying fiscal relations between different levels of government. In this regard. the issues faced by unitary countries and federal countries are largely the same.

My talk today is divided into two parts. First, an overview of fiscal federalism arrangements in place in OECD Member countries. Second, a general discussion of some of the key fiscal federalism issues faced by OECD Member countries.

Prior to that, however, I would like to say a few words about the OECD's work in this area. I come from the Public Management directorate at the OECD. This directorate serves as the secretariat for a number of committees dealing with public management issues, including the Senior Budget Officials committee. This committee is composed of budget directors and other senior budget officials from Member countries. The present chairman is Mr. Hans Reckers, the German Budget Director. This committee meets annually. We also have meetings at ministerial level, albeit less frequently. The last ministerial meeting was in March of last year. It was chaired by Ms. Alice Rivlin, then Director of the Office of Management and Budget in the United States. The whole spectrum of public expenditure issues is discussed at these meetings, including fiscal federalism issues.

My talk today draws to a large extent on the discussion of fiscal federalism issues at these meetings. As these are meetings of national government officials. I will be discussing these issues from this viewpoint.

Overview
I would like to begin with a quick overview of fiscal federalism arrangements in OECD Member countries. This reveals the wide range of possibilities available in this area. There are countries with very strong sub-national governments and countries with very weak sub-national governments, and everything in between. There is no single “OECD model.”

The methodology we use to compare fiscal federalism arrangements across Member countries is to look at the share of sub-national governments in total government receipts, principally taxation. Since taxes levied are an important financial constraint, this can be used as an indicator for the degree of autonomy of sub-national governments in individual Member countries.

All the specific figures are in the paper (Appendix A) but if we attempt to generalize about these findings, we can say that federal countries have the strongest sub-national governments. This is as we might expect and has been the case historically. Next in line are the Nordic countries and the Netherlands. These are all unitary countries, and in many ways share similar governance traditions. What is also significant about this group is that sub-national governments have been getting stronger in these countries in recent years. The weakest suhnational governments are to be found in unitary countries with a Napoleonic or a Westminster tradition of governance. Examples include France, Greece, Italy, New Zealand and the United Kingdom.

Revenue raised by sub-national governments is half the story. The other half of the story is what share of total expenditure is accounted for by sub-national governments.

As a general rule, the share of total expenditure of sub-national governments is greater than their share of total revenue. The difference is for the most part attributable to transfer of funds from national governments to sub-national governments. There are, however, no obvious groupings that emerge from looking at these figures. Some federal countries, notably Australia, have very significant transfers to sub-national governments, whereas other federal countries, such as the United States, have a relatively low level of transfers. Similarly, some Nordic countries, for example Denmark, have very substantial transfers whereas others, such as Iceland, have relatively few. In general there is a tendency for other unitary countries to have a more substantial transfer of funds from the national government to lower levels. I will turn to the general issue of inter-governmental transfers later in my talk.

I should note that certain caveats need to be made about the manner in which the above conclusions were reached. First, different accounting regimes for government revenues and expenditures and divergent treatment of social security funds can significantly affect the reported financial flows. Second, the figures capture, by definition, only financial flows and do not incorporate mandates from national governments to sub-national governments. Nonetheless, anecdotal evidence tends to confirm the general conclusions reached.

I would like to conclude this overview by noting that current fiscal federalism arrangements in Member countries are largely a function of each country's history and entrenched traditions. If Member countries were setting up their systems today from a clean slate, they would no doubt look different. The definite trend we observe in Member countries is to strengthen sub-national governments, giving them more responsibility for revenues and expenditures. But the very history and entrenched traditions that are responsible for the current arrangements are acting as a check on the pace of reforms in this area. I would, however, stress that the national government will always be the dominant level of government. In countries with strong sub-national governments, such as the United States, the Federal government still accounts for about two-thirds of all activity.