OVERVIEW OF FISCAL DECENTRALISATION
Italy is a parliamentary republic consisting of 20 regions (five of which have special statute and enjoy special autonomy granted by the Constitution), 107 provinces (two of which have special statute and autonomy) and 7,926 municipalities.
In what follows, qualitative indicators of local government include regions, provinces and municipalities.
Legal acts governing fiscal decentralisation
Local self-government and the subsidiarity principle's application to the regions are granted by the Italian Constitution. The reform of 2001 substantially altered the relationship between the central state and the sub-national authorities, opening the way to fiscal federalism. However, the implementation of such changes has been very slow. The most significant progress was made with the framework law of 2009, which empowers government to adopt legislative decrees enacting fiscal federalism and has the overarching objective of guiding the country towards a more complete federal fiscal structure. Since then, several decrees have been adopted by different governments and approved in parliament. Particularly relevant in this framework is the distinction between: i) functions corresponding to essential services ('livelli essenziali delle prestazioni'), for which the introduction of the “standard cost" criteria instead of the “historical expenditure" criteria (standards of quality and efficiency are used to calculate the real cost) is foreseen and which are funded according to need; and ii) other categories of expenditure, for which transfers across sub-national governments are based on the fiscal capacity of each region and on the need to fulfil the financial gap in providing essential services.
Law 56/2014 initiates a new phase of reforms by establishing metropolitan cities, abolishing the elective bodies of the provinces and redefining their competences.
Qualifying fiscal decentralisation
The territorial organisation of Italy is different from that of traditional federations such as Germany, Belgium and Austria. However, Italian regions enjoy a rather high degree of fiscal autonomy over both revenue and expenditure.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
Local governments' expenditure amounted to 29% of total general government expenditure in 2018. This ratio has remained largely unchanged since 2000. In 2016the regions alone accounted for around 22% (around two-thirds of the total local expenditure). Provinces have almost no spending powers and control only around 3% of total local government expenditure. The share of municipalities in total general government expenditure is just below 10%. These ratios at the local level have also remained mostly unchanged since 2000.
Regions finance their expenditure mainly through an own tax ('Regional Tax on Productive Activity', or IRAP), a share of personal income tax ('addizionale IRPEF'), revenues, shared tax revenues of VAT and transfers for provision of health services and equalization mechanisms.
Provinces have very limited own resources, while municipalities mainly finance their expenditure through the Single City Tax ('Imposta Unica Comunale'), which is made up of three different taxes related to real estate property (the IMU on non-housing property and on luxury housing, the TASI, a tax on buildings to finance indivisible services, and the TARI on urban waste), shares of the personal income tax ('addizionale IRPEF'), other small taxes and equalisation mechanisms.
Fiscal equalisation mechanisms
The Fondo Perequativo is a fiscal equalisation tool introduced by Law Constitution 3/2001 that distinguishes the different levels of government (regions, provinces and municipalities) and the nature of the expenditure items. In the case of essential services, the Fondo Perequativo should compensate for any imbalance between tax revenues of the regions and allow them to provide services under their competence to uniform levels throughout the national territory; in the case of other expenditure items, it aims to compensate those local levels of government with a lesser fiscal capacity.
LEVEL OF FISCAL DECENTRALISATION
Local governments in Italy had an overall degree of revenue autonomy (own revenues relative to total resources available) of 56% in 2018, which is just above the EU average (53%). These figures have remained largely unchanged since 2000. A corollary of this is that the transfer dependency ratio (the share of expenditure covered by transfers) is also roughly in line with the EU average. In 2018 this was 45% and 48% respectively.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
Local governments' own revenues represented 16% of total general government revenues in 2018, a figure largely unchanged since 2000. , Central government revenues amonted to around 480,817 million euros which corresponds to about 27.2% of GDP in 2018. Local government revenues amounted to 247,282 million euros which corresponds to 14% of GDP in 2018. .
The composite ratio, which captures aspects of fiscal decentralisation of both revenue and expenditure, suggests that local government has a degree of fiscal decentralisation that is above the EU average (23% and 16% respectively in 2018).
As noted, Italy's local authorities' have a level of revenue autonomy which indicates that about half of their total available resources come from own revenues. Nevertheless the degree of tax autonomy (28.1%) is comparatively not as high. Regions and municipalities have restricted powers over setting rates and reliefs for half of taxes.
Source: authors’ elaboration on OECD data. For further details, see methodology.
Fiscal rules and borrowing capacity
Fiscal relations between central and sub-national government levels in Italy are mainly regulated by the Domestic Stability Pact (DSP) which was established in 1999 with the aim of improving governance relations. The DSP rules are set every year by the budget law and contain constraints on expenditure or impose a balanced budget for sub-national governments. Over time, the effectiveness of the DSP in maintaining budgetary discipline has declined due to frequent changes to targets and coverage, which have created uncertainty. From 2012, sub-national governments have had to provide a contribution to the national consolidation effort of around 0.4% of GDP per year.
The Health Pact is a separate fiscal mechanism which regulates regions' health-related expenses. The pact sets constraints on current and capital expenditure for healthcare by region.
According to a 'golden' rule established in 2001, local and regional bodies are allowed to carry a deficit only to finance investments (Article no. 119 of the Italian Constitution).
Italy scored 4.80 in 2017 on the European Commission's composite index of fiscal rule strength.
Deficit and debt at sub-national levels
According to Eurostat data for 2018, local governments had an overall budget surplus of 0.2 and a total gross debt of 7.2 % of GDP. While deficits deteriorated just after 2000, two waves of adjustments in 2006 and in 2011 have managed to keep debt levels mostly balanced with minor fluctuations since 2012.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA
Local governments in Italy have competences, often very considerable, in some specific policy areas. However, the central state remains largely responsible for general public services, on which it spends almost two-thirds of the total budget, and is the only government tier with competence for foreign affairs and defence matters, and virtually the only one with competence for social protection.
In 2017, local (or more specifically regional, as the regions are in charge of the heath matters) government expenditure on health represented 98% of total general government expenditure in the field. It is interesting to note that health being an essential service, it is entirely funded at the central level. The next policy area in order of local entity expenditures as a percentage of total public expenditures is environmental protection (93% in 2017), followed by housing and community amenities (87% in 2017). The value for health is well above the EU average (21% in 2017), indicating that Italy is an exception in this respect, while the other two values are much more in line with the EU averages. In 2017 the average for environmental protection across the EU was 71% whilst housing and community amenities was 78% of general government expenditure in the field.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
In the budget of local entities, health (48% in 2017) is unsurprisingly by far the most important spending item. In 2017, heath expenditure in Italy amounted to 8.84% of GDP, or more than 150 billion euros. General public services (16%), economic affairs (11%), environmental protection (6%) and education (6%) follow some way behind, and all other items are below 5%.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology
