The degree of fiscal decentralisation of each country is measured using quantitative synthetic indicators complemented by qualitative information.

 

The overall information collected and assembled should offer a picture of the division of powers in the area of fiscal decentralisation in a way that is consistent with and better qualifies the existing information available on the CoR website on Division of Powers. Indeed, while the information from primary sources (mostly national legislation) is important, it offers a complex picture that is sometimes difficult to understand and use.

 

Qualitative information aims to illustrate country-specific features and institutional arrangements, which are often very rich and highly heterogeneous, but only quantitative standardised indicators can grant the basis for a rapid understanding of the essential features of a country. This approach has two additional advantages. First, it makes comparisons across countries and relative to EU averages possible. Second, the evolution of fiscal decentralisation can be tracked over time and updated on an annual basis. 

 

Quantitative indicators are based on data provided by Eurostat and the OECD. For each country, these databases allow to produce a snapshot view of the level of fiscal decentralisation between the central government and the sub-national entity level by the use of measures of revenue, internal government transfers and expenditure, both at the aggregate level and by policy area.

 

The indicators are based on the classification of data followed by the European System of Accounts (ESA 95) and used by Eurostat, which differentiates the public sector (classified as S13) into four subsectors:

 

Under this classification, the sub-national public sector includes the two sub-sectors S1312 (when it exists) and S1313, but the data are not consolidated between the two sub-sectors (i.e. the sum of the subsectors S1312 and S1313 is greater than S13 minus S1314+S1311).

 

The indicators compare measures of spending and revenues related to the levels S1311 and S1313, as well S1311 in the case of federal states.

 

A similar classification is followed by the OECD, which compiles data based on the 1993 System of National Accounts in which the general government sector consists of central, (federated) states (when they exist), local governments and the social security funds.

 

When relevant and depending on availability, indicators are also based on this second source of data. For some specific countries, most notably for EU candidate and potential candidate countries, for which a systematic collection of data in international databases does not exist, data is taken from alternative sources, such as specific reports and studies. 

 

It is important to acknowledge that neither dataset listed above provides detailed information about the sub-national level of authority. Only two levels (three for federal states) of powers can be taken into consideration – central government and the sub-national level – when building the indicators.

 

The lack of consistent and reliable data on expenditure and revenue of the different sub-national levels – namely regions, provinces and municipalities – implies that the quantitative indicators are unable to offer a fully-fledged quantitative measure of fiscal decentralisation for these entities.

 

In order to overcome this limit, the quantitative indicators are complemented with qualitative information on the actual multi-level government structure of each country. This qualitative information, found mainly in national sources but also in sources from the European Commission, the OECD and elsewhere, describes and explains how fiscal powers are distributed across different sub-national government’s levels in terms of revenue collection and spending implementation. The qualification of fiscal decentralisation in terms of decision powers (i.e. who decides on tax rates, bases and reliefs) is based on the OECD index on tax autonomy which summarises such qualitative considerations. This database contains measures of tax autonomy for the central and sub-national levels (two in the case of federal states) since 1999, with the latest update from 2008. Since this indicator is very stable and is only affected by major reforms, it is still relevant.

 

An update is expected for 2014. For countries under consideration that are not OECD members, an attempt to replicate the OECD index (using the OECD methodology) is undertaken. The relevant national ministries of finance of Lithuania, Latvia and Malta provided the required information.

 

The qualitative information (when available) also includes the degree to which local entities have access to capital markets and are allowed to borrow, as well as which fiscal equalisation instruments, if any, are in place.

  

In economic literature, the most common indicators of fiscal decentralisation relate to the distribution of public revenues and expenditures among the different levels of government. Consistent with this, and following the IMF approach,  four main indicators are used to illustrate the degree of fiscal decentralisation of a given country.

 

In the first indicator, the expenditure ratio, it is assumed that revenue equals expenditure. This is a simplification that excludes borrowing, both by the central government and at the level of sub-national entities. This is justified by the fact that borrowing is a one-off “income” that is reimbursed over time increased by interest. This can raise an inter-temporal problem when comparing central government behaviour with that of the sub-national level. In addition, the rules on the treatment of borrowing vary across countries, with off-balance-sheet borrowing becoming more common, hence making comparison across countries not fully accurate. Both factors can cause measurement distortions that make the assumption that all revenues (collected or transferred from another level of government) are spent an appropriate one, although the results represent an average and do not hold at each point in time.

 

In order to have a sense of the importance of borrowing at the sub-national level, the qualitative indicators of fiscal decentralisation are complemented by a chart depicting the evolution over time of the fiscal balance and the debt-to-GDP ratios at the level of sub-national government.

The expenditure ratio measures the share of spending taking place at the sub-national level (using all resources available, except borrowing) relative to total expenditure of the general government (using all resources available): 

 

Expenditure Ratio= (Subnational own revenues+Grants )/(Total General Government revenue)

 

Under the assumption that revenue equals expenditure, the ratio also measures the share of total revenues available at the sub-national level. A high ratio signals high decentralisation of tasks (spending in the different policy areas and collecting revenues), but not necessarily of decision powers, at the sub-national level.

The revenue autonomy indicator measures how much of the total resources available to the sub-national (local and state, if it exists) authorities (excluding borrowing) is actually raised locally.

 

Revenue Autonomy=(Subnational own revenues)/(Subnational own revenues+grants)

 

While a high revenue autonomy ratio could point to high decentralisation, the indicator alone does not say whether this relates to a large or small share of the total revenues. For this reason, this information is complemented by the own revenues decentralisation indicator, defined as the percentage of sub-national (local and state, when it exists) revenues raised at that level relative to total general government revenue. 

 

Own revenue decentralisation=(Subnational own revenues)/(Total general government revenue)

 

 

The transfer dependency ratio is the percentage of the actual subnational expenditure covered by transfers from the central government (grants):

Transfers dependency=(Grants )/(Subnational expenditure )

 

This ratio measures the degree of dependency of the sub-national level on resources distributed from the central level. In contrast to the revenue autonomy indicator, it tends to be low (though not necessarily) in countries with a high degree of fiscal decentralisation. The indicator of is approximately a complement to 1 of the revenue autonomy. The difference is an indirect indicator of the discrepancy between expenditure and total resources available at the sub-national level; as in the transfer dependency, the denominator is the actual expenditure at local level and not necessarily equal to the revenue. 

 

Finally, following the works of Martin-Vasquez and Timofeev,  the composite indicator captures in a single measure the degree of autonomy at the sub-national level on the revenue and on the expenditure side:

 

Composite ratio=(Own revenue decentralisation)/(1-Expenditure ratio)

 

In general the composite ratio is larger if the level of fiscal decentralisation, in terms of both revenue and expenditure, is higher, and vice versa. This implies that if a country exhibits a high level of decentralisation in terms of expenditure level but not revenue, the indicator will not necessarily be high. 

 

The EU28 countries, the candidate countries to date – Iceland, Montenegro, the former Yugoslav Republic of Macedonia, Serbia and Turkey – as well as three potential candidates – Albania, Bosnia and Herzegovina and Kosovo.

 

All the data presented in the charts contained in the factsheets are from official and standardised statistical data, as those provided by the international sources (Eurostat, OECD, IMF). These data have been published for the last 25 years (referring to the previous calendar year) and access is free using the data warehouse available on their respective websites.