Commission on Fiscal Imbalance Texts Submitted for the International Symposium on Fiscal Imbalance Report Supporting Document 3 ISBN: 2-550-38871-2 Legal deposit Bibliothèque nationale du Québec, 2002 Commission on Fiscal Imbalance TABLE OF CONTENTS General Introduction ....................................................................................................................................................... 1 Decentralization in the United States: Where has the Country Headed? ........................................................................ 15 By William F. Fox Forces Behind Centralization and Decentralization in the United States........................................................................ 25 By Bruce A. Wallin Maintaining Fiscal Equilibrium in a Federation: Germany............................................................................................. 37 By Paul Bernd Spahn Reforming Intergovernmental Fiscal Relations in Germany: The Bavarian Point of View............................................ 55 By Otto Beierl Fiscal Federalism in Switzerland: A Survey of Constitutional Issues, Budget Responsibility and Equalization............ 63 By Bernard Dafflon Balance and Imbalance in the Swiss Federal System.....................................................................................................101 By Sonja Wälti The 2000 Reform of Intergovernmental Fiscal Arrangements in Australia ....................................................................113 By David J. Collins Concept of Fiscal Decentralisation and Worldwide Overview .......................................................................................145 By Robert D. Ebel and Serdar Yilmaz Fiscal Federalism in Belgium..........................................................................................................................................175 By Marcel Gérard The Lambermont Agreement: Why and How? ...............................................................................................................195 By Géraldine Van der Stichele and Magali Verdonck The Funding of Autonomous Communities in Spain......................................................................................................223 By Pere Galí The Finances of Decentralized Authorities and Financial Relations between Authorities at Different Levels in France Trends and Outlook.............................................................................................................................................227 By Guy Gilbert The Process of Decentralisation in Italy: A Focus on Regional Governments ...............................................................249 By Laura Raimondo Decentralization in Some Non-Federal Countries: The Case of the United Kingdom...................................................265 By David Heald Biographical Notes..........................................................................................................................................................287 i Commission on Fiscal Imbalance GENERAL INTRODUCTION 1. INTRODUCTION The Commission on Fiscal Imbalance, set up by the Québec government, planned to hold an international symposium on September 13 and 14, 2001 at which a number of experts were to describe intergovernmental fiscal arrangements in various countries, namely four established federations (United States, Germany, Switzerland and Australia), one recent federation (Belgium), one country whose institutions are similar to those of a federal country (Spain) and three non- federal countries that nonetheless have a multilevel government structure1 (France, the United Kingdom and Italy). This selection of countries provides a fairly complete portrait of the existing situation in developed countries with federal systems2 and in a few non-federal countries with societies similar to ours. Mr. Robert Ebel of the World Bank Institute was to provide an overview of the situation around the world, more particularly in developing countries and countries in transition to a market economy. Unfortunately, the tragic events of September 11 in New York forced the cancellation of the symposium. Almost all the speakers had sent a text they intended to use for their presentation during the symposium.3 In addition, the Commission had already conducted a study of the fiscal arrangements in six countries that were to be analyzed at the event. This work is summarized in a document entitled Intergovernmental Fiscal Arrangements: Germany, Australia, Belgium, Spain, United States, Switzerland. This general introduction summarizes the speakers’ papers, an exercise that involves definite limits and difficulties. First of all, the symposium was not held. Next, federations are complex entities whose specific features cannot easily be isolated for comparison purposes. A specific degree of fiscal decentralization4 may prove excessive in a federation whose people have very similar preferences, while it may prove insufficient for a federation with sharp regional differences. Lastly, a summary seeking to bring elements present in all the texts would be doomed to failure. An observation mentioned in many texts may not be in some, and the situation in some countries may differ from that of most countries of the sample. The following summary will, accordingly, try to present the ideas and observations found in many of the texts, with nuances where necessary. The Analytical Framework The following summary is based on a number of general principles of fiscal federalism, principles that implicitly or explicitly inspire most of the texts submitted. Fiscal federalism studies the assignment of fields of jurisdiction among various orders of government in terms of spending (defence, health and education) and taxation (personal income tax, corporate tax and consumption tax). It also deals with intergovernmental fiscal relations. There is a broadly accepted presumption among fiscal federalism experts to the effect that jurisdiction over the delivery of public services should be allocated to the order of government closest to the citizen, unless responsibility for such delivery can be more effectively taken on by a government that is further. This principle is known as either the decentralization principle5 or the subsidiarity principle.6 But decentralization of responsibilities without an allocation of sufficient financial resources (or access to sufficient financial resources) would not allow the full realization of the benefits of decentralization. There must be a matching between spending and revenue. This can be obtained in two fundamentally different ways, i.e. through own-source revenue (in which case the federated states are said to have fiscal autonomy) and through transfer revenue from the federal government (in which case they enjoy financial autonomy if the transfers are unconditional). 1 The expression “levels of government” is appropriate in the context of non-federal countries. The terms “central”, “regional” and “local” in this case designate the three major levels. In the case of a federation, we speak of “orders of government”. Each order is sovereign in its fields of jurisdiction and accordingly is not subordinate, in these areas, to any other. In Canada, the terms “federal order”, “provincial order” and “local level” are used since the municipal level is subordinate, constitutionally, to the provincial order. 2 There are currently 23 federations in the world. Ronald Watts (1999) adds Spain to this list. 3 Only professor Albert Solé, of the University of Barcelona, was unable to send us a text. He had agreed, at the last minute, to replace a speaker who was unable to attend and planned to use manuscript notes for his presentation. 4 A distinction should be made between federalism and territorial administrative decentralization, in which the division of jurisdictions or of tasks between the central and territorial authorities is not constitutionalized and may, consequently, be amended at the discretion of the central authorities. The term “decentralization” in the present document refers to the notion of federalism unless it is clear, from the context, that the other meaning is intended. 5 Robert Ebel notes (see p. 145 of the present document) the classic formulation of this principle, attributable to Wallace Oates, author of the major work Fiscal Federalism in 1972: “each public service should be provided by the jurisdiction having control over the minimum geographic area that would internalize benefits and costs of such provision”. 6 The texts give many definitions of this principle. We will return to this later. 1 Commission on Fiscal Imbalance From the outset, some terminological clarification is needed. The framework of analysis for fiscal federalism used here refers to two separate situations, depending on whether the country in question has a non-federal system of government with many levels or a federal structure. In terms of analysis, there is an essential difference between non-federated countries and federations. In the former case, regional and local administrations are agents of the central power. By contrast, a federal structure implies the presence of orders of government that are, in a sense, “side by side”, autonomous in their respective fields of jurisdiction. The principles of federalism, such as the principles of autonomy, participation and separation, have to be taken into account. In fact, in federal countries, these principles have in practice precedence over the more