European Local Government Finances and Local Autonomy
SofiaCalzola,Thomas Prorok,Kesira Yildirim
1 Introduction
This article provides a countrycomparison on local finances and local autonomy.The analysis of different data sources provides an overview ofEuropean local governments finances and their financial self-reliance. Furthermore, countries are comparedregarding theirdegree in fiscal autonomy and decentralization. In scientific literature local autonomyismeasured using different indicators,mostcommonly quantitative indicators like shares of financial resources,e.g. subnational expendituresand revenuesas shares of general government budgets. However,to give a comprehensive picture on local autonomy qualitative indicatorslike the share of responsibilities allocatedtosubnational governments are considered as well.The quantitative indicatorsused in this article arelocal governmentsper capita expenditures, subnational expenditures as a share ofgeneral expenditures,the share of intergovernmental transfers and the shareof tax revenues. Local tax autonomy and the local autonomy index (LAI) incorporate quantitative and qualitative measures.Both indicators supplement the comparison. The article concludesby linking the LAIwith thegovernment effectiveness indicator.
Why itisimportant: Scholars find that the relationshipbetween local autonomy and well-being, satisfaction with services, democracy and trust are positively correlated (Bjornskov etal., 2008; Ladner etal., 2021).In general, it is argued that fiscal decentralization can lead to improvements in social outcomes (e.g.health and education). The necessary prerequisite, highlighted by Nakatani et al. (2022),is good governance.
2 LocalGovernmentBudgetsinEurope
Figure 1 showsa diverse pictureof local governments per capita expenditures in 2020. The average per capita local expenditures in Europe was 3.492 Euro. Denmark, with percapita expenditures of 18.470 Euro, shows the highestlocal government expenditure per inhabitant, followed by the other Nordic countries (Sweden,Finland and Norway)and the Netherlands, which are significantly above theEuropean average.On the contrary, traditionally centralized countries in EasternEurope,such as Hungarywith 904 Euroexpenditures per capita, are far below the average. The federal countries Belgium, Germany,Austria, Spain and Switzerland reporta secondlayer of subnational expenditures,i.e.state expenditures,which are not included and therefore an explanation for thelower figures in these countries.
3DecentralizationinEurope
AccordingtoastudyfromtheCouncilofEuropeanMunicipalitiesandRegions(CEMR,2022)big differencesindecentralizationoccurinEuropeancountries.Infigure2theshareofsubnational governmentexpenditureofgeneralgovernmentexpenditureisvisualizedandprovidesa measureonthedegreeofdecentralizationinthe40membercountriesoftheCEMR.
Thedatarevealthatwhiletheaverageshareofsubnationalgovernmentexpenditurein2020is 23.95%,thedifferencesbetweenthecountriesarehigh.18outof40CEMRcountriesarerather centralizedwithvaluesbelow20%.WithinthiscategoryMalta,CyprusandGreecearehighly centralizedwithsharesofsubnationalgovernmentexpenditureof1.1%,3.6%and6.5%, respectively.TheremainingCEMRmembersshowmediumtohighdecentralization.The countrieswiththehighestsharesofsubnationalexpendituresareDenmark,Belgium(federal), Germany(federal),Sweden,Spain(federal)andFinlandwith64.4%,49%,48.9%,48.7%,47.3% and40.1%.Withinthiscategory,allfederalcountriesexceptforAustria(33,1%)showhigh degreesofdecentralizationsincesubnationalexpendituresincludethestatelevel.
4 LocalGovernmentDependencyonIntergovernmentalTransfers
Figure 3 shows the shareof local budgets resulting from intergovernmental transfers.It is assumed that the higher the intergovernmental transfers,the greateris the financial dependence oflocal governments on other tiers of government and the loweris the local autonomy. The average for the OECD-European countries is 49.8%,which shows a strong dependenceof local governments onintergovernmental transfers: in 13 out of 26 countries, transfersfrom other levels of government represent the largest shareof the local budget, accounting for 50% or more oflocal revenues. Lithuania, Estonia,the SlovakRepublic and the Netherlands are the countries with the highest share of intergovernmental transfers with 87.9%, 85.8%, 77.8% and 74.7%, respectively. Amongthe other 13 countries, Iceland and Switzerland have the lowestshare: intergovernmental transfers account for 8.8%(Iceland)and 10.5% (Switzerland) of local revenues.It isimportant tostress that intergovernmental transfers canalsoinclude shared taxes and,in some countries (e.g. Italy), regional budgetstoo.
Source: OECD Fiscal Decentralisation Database
5 LocalGovernmentsowntaxrevenuesinEurope
Business and property taxes represent themost common taxes levied bymunicipalitiesin Europe. Ownlocal taxes, jointly with own fees, are an important source of revenue for local governments to balance municipal budgets and toguarantee local autonomy.Data from the OECD Fiscal Decentralisation Database show the percentage of the local budgets which comes from own tax revenues: it is assumed that the higherthe share of tax revenues, the less the financial dependenceof local governments on transfers from the central government.
Figure 4 shows that in Europe the average share ofown tax revenues of total local revenues is 32.1%:in 8 out of 26 countries, tax revenues represent onlya small share of the local budgets, accounting for less than 20% of local revenues. Estonia, the Czech Republic,Lithuania, the Slovak Republic,the Netherlands, IrelandandAustria arethe countrieswith thelowershare of less than 15% tax revenues atlocal level.
Amongthe other 18 countries, Iceland,Sweden, Switzerland and Spain have the highestshare (above 55%):taxrevenues account for 78.8% (Iceland),60.2 (Sweden),58.8% (Switzerland) and 58.2% (Spain) of local revenues.
Source: OECD Fiscal Decentralisation Database
6 LocalTaxAutonomy
Onthe one hand local tax autonomy is defined as the ratio of tax revenue in thelocal budget. On the otherhand,as highlighted in the CEMR report, the local government’s competence to determine local taxes,set tax rates and tax reliefs are important characteristicsof goodmultilevel governance andlocal taxautonomy as well. Infigure 5 the local tax autonomyindicator is based on data of the OECD Fiscal Decentralisation database, itincludes quantitativeand qualitative characteristics andwas further modified for thepurposes of the CEMR-report. The average local tax autonomy for the CEMRcountries is 73%.16 outof 28 countries are above90%. In these countries local governments have high tax autonomy:they are authorized to set tax rates and reliefs for municipal taxes. Four European countries (Austria, Latvia, Poland andSlovenia) have a multi-level governance system characterized by weak local tax autonomy with a share of 23.7%, 13.6%,25.6%and 15.7%,respectively. In 6 countries the value is below 30%,they have minor or no competenceon setting rates and reliefs.
7 LocalAutonomyIndex(LAI)
The report “Self-rule index for local authorities in theEU,Council of Europe and OECD countries, 1990-2020” (Ladner et al.,2021)presents an analysis of local autonomy in 57 countries across 30 years. Local autonomyis described byeleven variables, theseare combined to seven dimensions(i.e.legal autonomy,policy scope, political discretion,financial autonomy, organizational autonomy and non-interference)which in turnare condensed to the local autonomy index (LAI). The LAIprovides an appropriate estimator for local autonomy as nonquantitative characteristics and competences aremeasured.
According to the authors,and similar to the abovefindings, Nordic countries in Europe arehigh performers. Switzerland, Franceand Liechtenstein show a high degreeof autonomy (index values above70) as well.Countries with a low index(less than 40)are Cyprus,Malta and Moldova. In between these two groups there are countrieswhere municipalities havea mediumhigh degree of autonomy (index values between60 and 70):Norway, Portugal,Spain, Germany, Slovakia,Serbia,Estonia,Italy, Lithuania, Poland, Austria,Belgium andGreece. Countrieswith a medium degree of local autonomy (values between50 and 60) are: Netherlands, Bulgaria, Luxembourg,Montenegro, CzechRepublic, Georgia, Macedonia,Albania, Slovenia, Latvia, Bosnia and Herzegovina, Romania and Croatia.Countrieswith amedium-lowdegree of autonomy (values between 40 and 50) are thus:United Kingdom,Ukraine, Kosovo, Hungary,
8 Conclusions
Local governments are the bodies closestto the citizens.Thus, decentralisation and local autonomy are the keys to good governance and better services.Data show that at European level,several of the countries are rather centralised and local governments donot havemuch autonomy. In terms of fiscal autonomy, it can be seen that a high percentage oflocal budgets comes from intergovernmental transfers, whichmeans that mostlocal governments are fiscally dependent on the centrallevel: the average for the OECD European Countries is 49.84%(figure 3).Own local taxes and fees for services areimportant revenues to ensure balanced municipal budgets andlocal autonomy.However,eventhough on a European level the average of local budgets coming from owntax revenues is 32% (figure 4).
Sources: Ladner, et al. (2021) and World BankWGI (2020)
Figure 7 relates the LAI,which ranges from 0 to 100, with the World Bank’s government effectivenessindicator (WGI, 2020), which ranges from -2.5 (weak)to 2.5 (strong).Government effectivenessismeasuredthrough perceptionson the quality ofpublic services, the quality of civil serviceand its independence from political pressures,the quality of policy formulation and implementationandthe credibility of the government’s commitment to these policies.The correlation plot shows that higher local autonomy isassociated with higher government effectiveness. At the top right, 13 out of 35 countrieshavemedium to high local autonomy scores (above 55) and at the same time high governmenteffectiveness scores (above1). Whereas countries with weaker local autonomy underperform regarding governmenteffectiveness too.
In somecases a high value oflocal autonomy (above55) and low government effectiveness (below 1)can be observed at the sametime (yellow rectangle).The reasons needmore clarification. It can be observed that most ofthese countries run throughinstitutional transition or were hitparticularly hard by financial crises.This suggests that local autonomy does not automaticallylead to bettergovernment effectiveness.But in general,it can be stated that there is a connection between strong local autonomy and highgovernment effectiveness.
Since thereis a positive relationshipbetween local autonomy and effective governance, it is imperative for countries to increase local governments fiscalindependence. In orderto ensure local autonomy and morebalancedmunicipal budgets,greater shares of fees and own local
taxes areneeded to avoid the fiscal dependence of local governments on other tiers of government.Especially inEasternEuropean countries reforms towardsmorelocal tax autonomy are needed.
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Ladner,A., Keuffer, N.,Bastianen, A.,2021, Self-rule index for local authorities in the EU, Council ofEuropeand OECD countries, 1990-2020” European Commission, Directorate-General for Regional andUrban Policy, Brussels
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Nakatani, R.,Zhang, Q.,GarciaValdes,I., 2022, “Fiscal Decentralization Improves Social Outcomes When Countries Have Good Governance” International Monetary Fund (IMF) Working Papers22/111, Washington D.C.
OECD Fiscal Decentralization Database, https://www.oecd.org/tax/federalism/fiscaldecentralisation-database/
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