Hansjörg Blöchliger

Taxes or Grants

This paper analyses trends in and driving forces of the revenue composition of sub-central governments (SCG). Between 1995 and 2005 the share of SCG in total government spending increased from 31 to 33%, while the SCG tax share remained stable at around 17%, increasing SCG’s dependence on intergovernmental grants. While equal access to public services is the most common justification for such grants, the grant systems of most countries are much larger than required by equalization. Moreover, rather than smoothing out SCG revenue fluctuations over the cycle, grants often tend to exacerbate them. Finally, there is some evidence that grants reduce SCG tax raising effort, inflate SCG spending and increase SCG deficits and debt. The economic crisis will both sharply reduce SCG’s own tax revenues and – via budget constraints at the central level – increase pressure on the grant system. The crisis could hence help rethink the SCG revenue mix, their tax structure and the size and design of intergovernmental transfers. Impots ou transferts : quels revenus pour les administrations infranationales ? Ce document analyse les tendances et les determinants de la composition des revenus des administrations infra-nationales (AI). Entre 1995 et 2005, la part des depenses des AI dans les depenses publiques totales a augmente de 31 a 33%, alors que leur participation aux recettes fiscales restait stable autour de 17%, accentuant de ce fait la dependance des AI envers les transferts intergouvernementaux. Bien que l’egalite d’acces aux services publics soit la raison la plus souvent invoquee pour justifier ces transferts, les systemes de transferts sont en realite souvent bien plus importants que ceux qu’impliquerait la simple perequation. Par ailleurs, les transferts ont tendance a amplifier plutot qu’a reduire les fluctuations de revenus au cours du cycle. Finalement, il semblerait que les transferts reduisent l’effort fiscal des AI tout en augmentant leurs depenses et donc leurs deficits et leur dette. La crise economique en cours a la fois va reduire fortement les impots propres des AI et – suite aux contraintes budgetaires au niveau central – augmenter la pression sur le systeme des transferts. La crise pourrait donc inciter a repenser la composition des revenues des AI, la structure de leurs impots et la taille et le design des transferts intergouvernementaux.

Intergovernmental Transfers: Are they pro- or counter-cyclical?

This note describes an empirical analysis to measure the cyclical properties of intergovernmental transfers. By modelling a fiscal policy reaction function, the paper tests whether transfers systems in 25 member countries of the Organisation for Economic Co-operation and Development (OECD) are pro-or counter-cyclical, i.e. whether they offset cyclical fluctuations of sub-central economies or, on the contrary, exacerbate them. Regression results suggest that transfer systems tend to be pro-cyclical in general and in more than half of OECD countries and tend to destabilise sub-central economies. Pro-cyclical grants hence often exacerbate the pro-cyclicality of sub-central fiscal policy. Transfer pro-cyclicality may be the result of several factors: Transfer spending is often a fixed share of central government tax revenue which itself tends to be pro-cyclical. Moreover, many grants are matching sub-central spending and hence tend to increase when sub-central spending rises. Finally, reform proposals are presented to make transfer systems less cyclical and more stabilising.

Fiscal Decentralisation and Income Inequality: Empirical Evidence from OECD Countries

Abstract Fiscal decentralisation might be partially responsible for rising income inequality by exacerbating competition between sub-national governments and compromising national government’s ability to redistribute. This paper investigates the relationship between fiscal decentralisation and economy-wide disposable income inequality. Drawing on a dataset of up to 20 OECD countries and covering the period 1996 to 2011, the analysis links a set of income inequality indicators and a wide array of fiscal decentralisation indicators. Results indicate that decentralisation might actually reduce income inequality, as measured by the Gini coefficient, but the effect is rather small and unstable across specifications. Fine-graining the analysis by using income percentile ratios, in turn, produces more significant and stable results. As such, the effects of fiscal decentralisation are not the same along the income distribution. While decentralisation tends to be associated with a reduction in income inequality between high incomes and the median, it is linked to a divergence of low income groups from the median, notably via sub-central tax autonomy. Transfers between levels of government also tend to be associated with an increase in the gap between lower and middle incomes. Interpreting these effects jointly, it seems that mainly middle income earners benefit from fiscal decentralisation.