Fiscal Federalism in the European Union To what extent should local and regional governments in the European Union be allowed to determine their own fiscal policies? Fiscal federalism is concerned with whether activities like resource allocation, income distribution and stabilisation policies should be carried out by central government or at a local level. 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 centralisation? • what are the costs of greater decentralisation? The volume includes case studies of all the major European countries, written by a team of international contributors. Amedeo Fossati is Professor of Public Finance at the University of Genova. Giorgio Panella is Professor of Public Economics at the University of Pavia. Routledge Studies in the European Economy 1 Growth and Crisis in the Spanish Economy, 1940–1993 Sima Lieberman 2 Work and Employment in Europe A new convergence? Edited by Peter Cressey and Bryn Jones 3 Trans-European Telecommunication Networks The challenges for industrial policy Colin Turner 4 European Union—European Industrial Relations? Global challenges, national developments and transnational dynamics Edited by Wolfgang E.Lecher and Hans-Wolfgang Platzer 5 Governance, Industry and Labour Markets in Britain and France The modernising state in the mid-twentieth century Edited by Noel Whiteside and Robert Salais 6 Labour Market Efficiency in the European Union Employment protection and fixed-term contracts Klaus Schömann, Ralf Rogowski and Thomas Kruppe 7 The Enlargement of the European Union Issues and strategies Edited by Victoria Curzon-Price, Alice Landau and Richard Whitman 8 European Trade Unions Change and response Edited by Mike Rigby, Roger Smith and Teresa Lawlor 9 Fiscal Federalism in the European Union Edited by Amedeo Fossati and Giorgio Panella 10 European Telecommunications Liberalisation Edited by Kjell A.Eliassen and Marit Sjøvaag Fiscal Federalism in the European Union Edited by Amedeo Fossati and Giorgio Panella London and New York First published 1999 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1999 Selection and editorial matter, Amedeo Fossati and Giorgio Panella; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Fiscal federalism in the European Union/edited by Amedeo Fossati and Giorgio Panella. p. cm. —(Routledge studies in the European economy: 9) ‘A collection of essays…most of which were presented at the conference…organised by the University of Genova (Istituto di Finanza and Polo Didattico di Imperia) and held in Imperia on 23 May 1997’–Pref. Includes bibliographical references and index. 1. Finance, Public—European Union countries—Congresses. 2. Local finance—European Union countries—Congresses. 3. Intergovernmental fiscal relations—European Union countries— Congresses. 4. Revenue sharing—European Union countries— Congresses. 5. Grants-in-aid—European Union countries— Congresses. 6. Federal government—European Union countries— Congresses. I. Fossati, Amedeo, 1937–. II. Panella, Giorgio. III. Series. HJ1000.F554 1999 98–41073 336.4–dc21 CIP ISBN 0-203-97615-0 Master e-book ISBN ISBN 0-415-20262-0 (Print Edition) Contents List of figures ix List of tables xi List of contributors xiv Preface xv Introduction 1 AMEDEO FOSSATIGIORGIO PANELLA PART I Europe and fiscal federalism 13 1 A comparative view of local finances in EU member 14 countries: are there any lessons to be drawn? GIANCARLO POLA Introduction: origin and scope of the chapter 14 The patterns of organisation and decentralisation of 15 expenditure at the end of the period: similarities and differences The revenue side of fiscal decentralisation 28 The compared evolution of local finance, 1980–93; the role 45 of reforms thereupon Current developments and debates: what lessons (if any) 47 can be drawn? Appendix A: institutional and organisational changes, 55 1980–93, by country Appendix B: non-tax revenue in EU countries: the system 57 of grants 2 Developing fiscal federalism in Eastern Europe 61 MICHAEL ENGELSCHALK Background 61 vi Principles of financing of subnational governments in 64 transition countries: the theory Financing subnational governments in transition countries: 66 current status of reform Reforming fiscal federalism in central and eastern 74 European countries: lessons and outlook 3 Stabilisation policy in the European Monetary Union 78 and fiscal federalism ALBERTO MAJOCCHI The Maastricht constraints and fiscal policy 78 The need for quantitative constraints on the deficit 80 The stabilisation policy in the European economy 82 The inadequacy of the solutions called for in the 85 Maastricht treaty The regional stabilisation policy 89 The size of the Community budget and the growth of own 91 resources Conclusions 94 PART II The state of fiscal federalism in Europe 98 4 Fiscal federalism in Austria: facts and new 99 developments ERICH THÖNI Introduction 99 Some remarks on Austrian fiscal terms, regional and local 100 government expenditure functions and finance systems Pros and cons of the development: a politico-economic 107 appraisal The new consultation mechanism between central, regional 114 and local governments Final remarks 115 5 Local government in Denmark 118 JØRGEN R.LOTZ The Nordic model of local government 118 vii The rôle of local personal income tax 122 Local government equalisation 124 Central control of local expenditure 125 6 Local taxation and intergovernmental fiscal relations in 128 France GUY GILBERT Introduction 128 The distribution of taxing powers among tiers of 129 governments Intergovernmental fiscal relations: equalisation and 137 compensation vs macroeconomic constraints The reform of local taxation: a prerequisite for fiscal 150 equalisation? Concluding remarks 155 7 Experiences with German fiscal federalism: how to 159 preserve the decentral content? HORST ZIMMERMANN Introduction 159 The basis: two principles of fiscal federalism 159 Paths to centralisation in Germany 161 How to retain the decentral content? 167 8 Local governments in Great Britain 174 DAVID KING Introduction 174 Great Britain 174 The structure of local government 175 Current expenditures and revenues of local authorities 180 Local taxation 181 Grants 185 Working out individual authorities’ needs to spend on 189 individual services Problems 195 viii 9 Towards fiscal federalism in Italy 199 AMEDEO FOSSATI Introduction 199 Current popularity of fiscal federalism in Italy 199 The blocks to achieving fiscal federalism 203 The problems of Italy 207 Conclusions 214 10 Fiscal federalism in Spain. Decentralisation: an 219 unfinished task JAVIER SUÁREZ-PANDIELLO Introduction 219 The decentralisation process: theory and policy 220 The autonomous financing models 229 The financing system of local governments 239 Final comments 247 11 Fiscal federalism in Switzerland: a survey of 252 constitutional issues, budget responsibility and equalisation BERNARD DAFFLON Introduction 252 Institutional issues 253 The public sector: some facts and figures 256 Budget responsibility 273 Tax coordination and harmonisation 274 Equalisation 281 Conclusions 285 Index 293 Figures 4.1 ‘Functional’ share (above 5 per cent of total expenditure)— Länder 105 1995, excluding Vienna. 4.2 ‘Functional’ share (above 5 per cent of total expenditure)—local 106 level 1995, excluding Vienna. 5.1 Local consumption expenditure (percentage of general government 118 expenditure, 1994). 5.2 Local government revenue in selected European countries 119 (percentage of GDP). 5.3 Map showing Denmark divided into municipalities and counties. 120 5.4 Functions, size, etc. of municipalities and counties in Denmark. 120 5.5 Local income tax revenue (per cent of GDP, 1994). 122 5.6 The rate of local and central income taxes in Denmark. 123 5.7 Number of municipalities according to municipal tax rate. 123 5.8 Age distribution of local government expenditure. 124 5.9 Municipal local income tax rates (averages, 1980–97). 126 5.10 Real growth in local government expenditure, 1983=100. 126 6.1 Rate of increase in the TP tax base with respect to GNP increase. 133 6.2 Structure of local business tax base (percentage). 133 6.3 Average equalising performance of the DGF for communes only (out 145 of the communes of overseas territories)—Gini index. 6.4 Differences in tax capacities among French communes, 1991. 145 6.5 Differences in extended tax capacity among French communes (tax 146 capacity+DGF), 1991. 7.1 Basics of fiscal federalism. 160 7.2 Administrative interaction. 164 10.1 Autonomous communities: level of responsibilities. 222 10.2 Autonomous communities: