Fiscal Powers

OVERVIEW OF FISCAL DECENTRALISATION

Spain consists of 17 autonomous communities (Comunidades Autonomas, CCAA), 50 provinces, 8,131 municipalities and two autonomous cities. It is a highly decentralised country with a significant share of spending powers devolved to the CCAA.

Legal acts governing fiscal decentralisation

The Spanish Constitution of 1978 ensures the right of self-government to the CCAA and considerable financial autonomy. It also grants provinces and municipalities autonomy in the management of their respective interests. The Royal Legislative Decree 2/2004 set the basis of the local financing system. The CCAA are divided into two groups ruled under the ordinary regime and the foral regime. Social security, however, is the responsibility of the central government (Article 41 of the Constitution). Major fiscal rules were set in the Budgetary Stability Acts of 2001 and 2006 and recently in the landmark reform of 2012 which included an amendment to the Constitution, limiting the borrowing capacity of the CCAA.

Qualifying fiscal decentralisation

In 2018, excluding social protection expenditures, sub-national spending accounted for 79% of total government spending, an increase of 3% over the previous 6 years. In line with the subsidiarity principle, the central government retains full autonomy in areas such as foreign policy, defence, justice, currency, and general standards of the health care system. Shared and devolved competences regard the provision of services in the fields of environmental protection, economic affairs (e.g. transport and communication), housing and community amenities, health, education and social protection.

At the same time, a high degree of fiscal autonomy is also granted on the revenue side to the CCAA and local governments: in 2018, shared and transferred taxes accounted for 36% and 51% of the CCAA and local government total revenues, respectively. The CCAA are divided in two main groups: those under the ordinary regime and those under the foral regime (namely, Navarre and the Basque Country). The CCAA under the foral regime enjoy full fiscal autonomy (excluding custom tariffs) under the condition that the overall effective tax burden does not fall below that of the rest of Spain. The ordinary regime sets the limits and the modalities under which tax revenues are shared between the CCAA and the central government: 50% of the personal income tax with normative discretion on regional rates, 50% of VAT with no discretion on regional rates, and 58% of duties on manufactured production of alcohol, tobacco and hydrocarbon. The CCAA retain 100% of the revenues and some normative discretion over the rates of the taxes on electricity, hydrocarbon oil retail sales, electricity, property taxes, stamp duties, motor vehicles, wealth taxes, inheritances and gifts.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

In Spain, sub-national expenditure’s share of total government expenditure was 51% in 2018; that of the CCAA amounted to 36%, and provinces and municipalities to 15%. While the share of provinces and municipalities has remained almost the same since 2000, with a slight increase since the 2008 financial crisis, the share of the CCAA has fluctuated over the years since then. This was caused by the austerity actions of the central government and the impact of social expenditures. Expenditures of the CCAA have since become relatively more significant.

Fiscal equalisation mechanisms

A fiscal equalisation mechanism among the CCAA is in place through the Guarantee Fund for Essential Public Services in order to guarantee uniform access to the essential public services of the welfare state (namely, healthcare, education and social services). All the CCAA contribute 75% of their tax revenues to this fund and the resources collected are redistributed according to the “adjusted population” criteria (a formula that balances different regional statistics such as population, area, dispersion, insularity, protected population, and elderly and youth share). 

LEVEL OF FISCAL DECENTRALISATION

In Spain, the authorities of the CCAA have a moderately high degree of fiscal autonomy. In terms of revenue autonomy, around 41% of the revenues of the CCAA (excluding the local level) originated from own financial resources in 2018. Of the four countries with a distinct sub-national state level (Austria, Belgium, Germany and Spain), Spain has the second highest level of revenue autonomy after Germany, which was 82% in 2018. While Spain’s CCAA’s revenue autonomy is significant, it is still below the “EU” average but this is largely because the significant economic weight of the German Länder skews the average upwards.

Similarly, local governments have a high degree of revenue autonomy (59% of the revenues in 2018), which means a fiscal imbalance (captured by the composite ratio) and transfer dependency that are lower than the EU average. There appears to be a notable impact from the crises on the indicators. Revenue autonomy at the local level had been falling gradually since 2000 from 59% but saw a sharp decline during the global financial crisis when it reached a low of 49% in 2009. Since then revenue autonomy has increased and from 2012 the figure has remained fluctuating around the average of 59%. Comparing these figures to the rest of the EU, the revenue autonomy at the local level was higher than the EU average by 8 percentage points between 2012 and 2015. This followed an increase from 1 percentage point in 2009 and has since fallen to 6% in 2018.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

The CCAA’s own revenues as a share of total government revenues (‘own revenue decentralization’) are higher than the EU average. In 2018 it was 15% compared to 7% at the EU level. The share of own revenues for lower level local authorities was 9% in 2018. This means that total sub-national decentralised revenues account for around a quarter of total revenues in Spain, which is high by EU standards (an average of 13%).

Spain is characterised by relatively high local government revenue autonomy, with a sizeable share of tax receipts and fees transferred to sub-national governments. As noted earlier, shared and transferred taxes to the sub-central governments (SCGs) amount to 36% and 51% of total consolidated government revenues, respectively.. At the same time, SCGs enjoy a high regulatory capacity over both shared and transferred taxes.

The CCAA had full autonomy over defining the transferred tax rates amounts for 92% of revenues, while taxes set jointly between the central government and the CCAA authorities account for 3% of revenues. Local entities (provinces and municipalities) have more restricted power over taxes: they have restricted discretion over setting rates for 51% of their revenues, and full discretion over setting rates and reliefs for 30% of revenues.

Fiscal rules and borrowing capacity

Spain had difficulties controlling the indebtedness of the state and the sub-national authorities. The CCAA also had substantial leeway to decide their levels of indebtedness and deficit. The deepening of the crisis led to a reform of Article 135 of the Constitution in 2012. This article, which originally simply expressed the limits for the central government to issue debt, now regulates the overall debt and deficit levels for the government as well the sub-national authorities. It allows for the budgetary stability rules for all levels of governance to be set in “organic laws”, thus allowing for relatively easy amendments when required compared to constitutional rules. The organic law establishing a new Budgetary Stability and Financial Sustainability Pact entered into force on 27 April 2012. While this law does not curb the financial independence of the sub-national authorities within their competencies, it does limit their levels of deficit and debt.

Deficit and debt at sub-national levels

According to Eurostat data, in 2018 the CCAA had a gross debt of 24.3% of GDP. This is a slight decrease from the peak of 24.8% in 2016. Deficits in the CCAA increased around fourfold since the 2008 global financial crisis and in the aftermath of the euro area crisis. In 2007, CCAA debt levels were at 5.7%, the lowest level since 2000. This mirrors the large increase in central government debt from 39.7% of GDP in 2008 to a peak of 100.7% in 2014 according to Eurostat. The level has since fallen to 97.6% in 2018.

The figures also show a rapid decrease since 2011 of net borrowing as a percentage of GDP, in line with the consolidation efforts. The entry into force of the new budget stability law has most likely played a considerable role curbing these relatively high levels of borrowing.

 
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.  

EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA 

Expenditure indicators

In the area of expenditures, the level of discretion is high for both the CCAA and provincial and municipal authorities. In Spain, CCAA governments have extensive competences in many general public services, and very extensive competences in health (92% in 2017), education (91% in 2017) and general public services (44% in 2017). The expenditures of the CCAA in health and education are higher than the other federated states in Europe. The three items listed above dominate the distribution of expenditure in the CCAA budgets.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.  

Provinces and municipalities

Given the share of expenditure at the level of the CCAA governments, the lower levels of government have rather low expenditure shares (below the EU average). The exception in 2017 was general public services (38%), public order and safety (25%), and recreation, culture and religion (60%). As a share of the local budget, the highest goes to general public services (above the EU average, although this is due to the low levels of expenditure at this level of governance in non-federated states).

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

OVERVIEW OF FISCAL DECENTRALISATION

Germany is a federal state composed of 16 regions (Länder). State powers are primary exercised by the Länder, as stated in the German Constitution: “the exercise of state powers and the discharge of state functions is a matter for the Länder" unless otherwise specified by the Basic Law. The municipalities are part of the Länder under Basic Law. Overall there are 16 Länder, 295 Kreise and 11,118 Gemeinden. Most cities with more than 100,000 inhabitants, and several with less, have both county and municipal responsibilities.

The analysis in this factsheet considers Länder as the state government level and Kreise and Gemeinden as the Local government level. 

Legal acts governing fiscal decentralisation

The most important legal act which governs fiscal decentralisation is the Basic Law (Grundgesetz). During 2006 there was a reform of the Basic Law with the aim of reorganising the legislation and making clearer distinctions between the competencies of the Länder and the Federation. A second stage of reform took place in 2009, which addressed the system of intergovernmental finances. Numerous other acts are established by the Länder themselves, which have legislative powers.

As stated by the Basic Law (Art.70 BL), legislative powers are assigned to the Länder unless conferred on the Federation by the Basic Law itself.   Exclusive legislative powers of the Federation extend over foreign affairs and defence, citizenship issues, migration, customs and trade, federal railways, and postal and telecommunication services. Current legislative powers of the Federation and the Länder concern civil and criminal issues, public welfare, economic legislation, energy, commerce, banking and insurance, labour issues, social security, unemployment insurance, educational grants and the promotion of research, urban real estate matters, hospitals, roads, environmental protection, and regional planning. Areas of legislation that have remained under Länder competence include education policy, municipal law, police law and the construction of roads.

Municipalities have the right to regulate all local affairs under their responsibility, within the limits established by law. However, municipalities are not allowed to establish fiscal legislation by themselves. The general principle states that the division of spending responsibility among the Federation and Länder for a government task matches administrative responsibility. For municipalities, the executive powers are limited to localised services, such as water, gas, electricity, refuse collection and wastewater services.  In addition, local planning (roads, public spaces and land planning) also falls under their responsibility. Cultural and sport activities are run on a voluntary level by the municipalities, and other social and health responsibilities may also be delegated to the municipalities.  

Qualifying fiscal decentralisation

Germany has one of the highest levels of fiscal decentralisation in the EU. Due to the considerable responsibilities of the sub-national governments, 50% of the government expenditures were managed by the Länder (31%) and municipalities (19%) in 2018. The German system seeks to ensure that funding distribution and the executive responsibilities are clearly defined.

 
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

The legislative powers of taxation and the distribution of tax revenue in Germany are precisely determined. The legislation is designed to ensure that the responsibilities of the different levels of government are financed by appropriate sources of revenues. The federal government has some exclusive legislative powers over customs duties (which are an EU own revenue) and fiscal monopolies. For other taxes, it has legislative powers when the revenues are collected in full part for federal activities or to finance fiscal equalisation transfers.
Rules for shared taxes between the federal government and the Länder are precisely determined by the Basic Law. Income tax revenue – reduced by a share for the municipalities - and corporation tax are shared equally. Additionally, 75% of VAT revenues are redistributed across the Länder to ensure a uniform standard of living across the country (Art.106 of the Basic Law).   

Fiscal equalisation mechanisms

The equalisation mechanism involving the Federation and the Länder in Germany is one of the strongest in Europe. The aim of the system is to guarantee each Land the means to cover its necessary expenditures and to ensure equivalent living conditions. The system involves three levels: primary horizontal equalisation between the Länder, secondary horizontal equalisation within the Länder, and finally vertical equalisation by supplementary federal grants.

At the first level a maximum of 25% of the Länder's share of VAT goes to those Länder with below average revenue from income tax, corporation tax and Länder tax. The second step further equalises fiscal capacity at the Länder level. In the third step, supplementary grants are provided by the Federation to those Länder with subpar fiscal capacity. Thanks to this system, the variance of fiscal capacity across the Länder is considerably reduced.

Within the Länder, a separate equalisation mechanism also affects municipalities. As between Bund and Länder, equalisation within the Länder is not only vertical but also horizontal, with wealthier municipalities having to contribute. 

LEVEL OF FISCAL DECENTRALISATION

The constitutional obligation for the Länder to execute state obligations explains their high level of revenue autonomy (82% in 2018), clearly above the EU average for this level of government (64% in 2018). Not surprisingly given the high revenue expenditure obligations, own revenue decentralisation (25% in 2018) and the composite ratio (37% in 2018) are higher than the EU averages (7% and 8% respectively). Concurrently, transfer dependency (19% in 2018) considerably lower than the EU average (36%). For municipalities, the level of autonomy is close to the European average (57% and 53% in 2018 respectively), but slightly lower in some indicators due to the importance of the Länder. In 2018, own revenue decentralisation was 11% compared to 13% at the EU level, the composite ratio at 14% compared to 16% at the EU level, and local level transfer dependency was at 43% compared to 48% at the EU level.

 
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

As the chart below demonstrates, taxes at the Länder level are mostly not determined by the Länder. The revenues are split with the central government. For municipalities, the level of discretion is higher. 

Source: authors’ elaboration on OECD data. For further details, see methodology. 

Fiscal rules and borrowing capacity

During 2011, Germany introduced a constitutional rule on balancing structural budgets that is applicable to the Federation and the Länder. The principle states that the budgets of the Federation and the Länder must be balanced without revenues from credit. The Basic Law further establishes a notional control account for the Federation where deviations from the ceiling are recorded: debits on this account exceeding 1.5% of GDP have to be reduced. These credit constraints may be exceeded in case of natural catastrophe or an unusual emergency. Closely linked to the reform concerning the budget rule was the introduction of a Federation-wide early warning system to prevent emergency budgetary situations.

The Stability Council, which commenced its work in 2010, was set up for this purpose. As part of the implementation of the Fiscal Compact in Germany, the Stability Council was also charged with monitoring compliance with the upper limit on the general government structural deficit. An independent advisory board was set up to support the Stability Council in this monitoring task. Budget balancing rules have also been in place for the local governments; budget law generally obliges the municipalities to balance revenues and expenditure in their administrative and capital accounts, but does permit some borrowing for investment purposes. The municipal agencies of the Länder are responsible for monitoring municipalities' budgets. In case of non-compliance, they can impose sanctions.

There is some coordination in the medium-term budgetary planning of the Federation and the Länder. A medium-term financial plan is adopted with the federal budget each year and extends over the next three years. The plan includes projections for the main expenditures and revenues. The Stability Council considers the overall economic and fiscal conditions in existence at the time of the federal, Länder and local government budget and financial plans being drafted. The aim is to coordinate budgetary and financial planning among the different levels of government. The Stability Council may also issue recommendations for the purposes of budgetary and financial planning coordination. 

Deficit and debt at sub-national levels

Given the very high level of responsibility of the Länder, the debt level is significantly higher than in other EU countries. In 2015 it was at 21.5% of GDP. This figure has recently been falling, reaching 17.6% in 2018. The lending to borrowing ratio  has concurrently been rising slightly from a balanced ratio of 0 in 2014 to net lending at 0.3 in 2018. In the case of municipalities, the level of debt is 4.8% of GDP in 2018 with no significant problem in the lending balance. 

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology. 

EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA

Given the constitutional obligation of the Länder to exercise state powers and discharge state functions, it is not surprising that expenditures as a share of general government expenditures are very high in most categories. The notable exception is health, which is mostly a federal competence, and defence. The responsibilities over education (76% of government expenditures in 2017) and public order and safety (73% in 2017) are very extensive. Given the additional expenditures in the municipalities, it is clear that sub-national authorities have the main responsibility over education in particular, but also have significant responsibility over public safety and general public services.

 
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

The distribution of expenditure within the Länder reveals education and general public services, as well as social protection, to be the most significant areas.

Municipalities

In terms of the share of total general government expenditure, municipalities have important roles to play in financing housing (66% in 2017), environmental protection (50% in 2017) and recreation, culture and religion (44% in 2017). Among municipal expenditures, financing social protection and general public services are the most significant.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.