Workshop organised by the Directorate-General for Economic and Financial Affairs of the European Commission
"Fiscal relations across governments levels in times of crisis – making compatible fiscal decentralisation and budgetary discipline"
Brussels, 27 November 2012
The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission is organising a one-day workshop on 27 November 2012 in Brussels. In the context of the current economic and budgetary crisis and based on the existing EU country specific policy experiences, the workshop will focus on the appropriate functioning of fiscal relations across government levels in order to render compatible the ongoing process of fiscal decentralisation in a large number of Member States with the required fiscal retrenchment so as to comply with the new EU fiscal governance rules and the new intergovernmental Treaty and ensure sound and sustainable public finances.
Over the last twenty years, the conduct of public finances in EU countries has simultaneously been affected by two major changes in the economic and institutional setting. Firstly, a deeper European integration with the formation of an economic and monetary union (EMU), and the enlargement of the EU to 12 new Member States. Specifically, the setting up of EMU called for the establishment of budgetary coordination mechanisms among its members since the consequences of unsound fiscal policies in one country would spill over to the others. The provisions of the Stability and Growth Pact (SGP), which establish the deficit and debt reference values for the general government sector, form the basis of the EU fiscal framework and have important consequences for the conduct of fiscal policy in terms of budgetary discipline.
Secondly, the decentralisation process that a majority of EU Member States have witnessed, implying greater legislative and fiscal jurisdictional powers for regional and local governments, particularly in politically sensitive areas such as health care, social assistance and education. As the traditional theory of fiscal federalism suggests, decentralisation may be justified on economic grounds: lower government tiers may better tailor the provision of public goods and services to local needs and preferences. The reshaping of national budgetary competencies among layers of government has not only affected the conduct of fiscal policy domestically through a greater decentralisation of public finances, but it has also implied significant repercussions in relation to the fiscal requirements set at the EU level. Specifically, the Treaty and the SGP obligations concern the general government as whole, that is, central, regional and local governments plus the social security sub sector. In the reshaped national institutional background, the weight of territorial governments in order to respect the SGP provisions has considerably increased.
At the present juncture, these two institutional innovations coexist with a severe crisis entailing high deficits and growing public debt, which in turn is putting significant strain on the sustainability of public finances and calls for the adoption of consolidation measures.
Against this background, a number of institutional policy reforms seeking the reinforcement of the fiscal governance rules at EU level (mainly the so-called "six pack", a set of regulations improving the EU fiscal governance, and the "fiscal compact", i.e. the intergovernmental Treaty on Stability, Coordination and Governance in the EMU) have been agreed in order to promote stability oriented budgetary policies at domestic level. This new EU institutional setting, with stricter rules and more rigorous monitoring and enforcement mechanisms, have important implications for the conduct of budgetary policy in Member States, in particular for those more decentralised in which the number of actors taking part in the fiscal policy making is higher.
In this context, the main question this workshop attempts to address refers to what policy reforms/initiatives can be introduced to make compatible fiscal decentralisation and budgetary discipline across EU countries to ensure fiscal consolidation and compliance with the new set of rules established at EU level.
In order to answer this question, the workshop will focus on three relevant policy issues:
1. The importance of the institutional fiscal policy setting at national level.
The existing domestic intra¬ governmental structure constitutes an important element to decide how the conduct of fiscal policy should efficiently be designed and implemented. More specifically, it appears relevant to check what the empirical evidence shows about the relationship between fiscal decentralisation and budgetary outcomes, or the possible existence of a causal connection between a less centralised budgetary policy making and fiscal discipline.
In turn, other critical factors may also play a significant role in explaining fiscal developments in a context of budgetary decentralisation. Thus, the analysis of bail out rules between central and territorial governments could have a major influence on the fiscal behaviour of sub national authorities due to moral hazard implications.
In the same vein, some features of domestic fiscal governance, forming the basis of national fiscal frameworks, may help harden budgetary constraints for lower government tiers facilitating the compatibility of budgetary decentralisation and fiscal discipline. For instance, the resort to numerical fiscal rules for territorial governments, setting targets for some budgetary aggregates such as budget balance, debt, expenditure etc, may be conducive to ensure that fiscal decentralisation is not achieved at the expense of unsound budgetary policies (e.g. the so called internal stability pacts introduced in some EU countries). Likewise, the introduction of independent fiscal councils responsible for monitoring budgetary developments and setting fiscal targets for sub national authorities could also be an appropriate instrument to promote fiscal coordination across government layers in decentralised Member States (e.g. the High Council of Finances in Belgium). Last but not least, proper coordination mechanisms, such as intergovernmental bodies, coupled with a medium term budgetary framework for multiannual fiscal planning encompassing all general government sub sectors, may reinforce fiscal discipline while avoiding the short term perspective typically observed in the budgeting process of some government tiers. To what extent these fiscal arrangements are efficient in promoting sound budgetary policies in a context of growing decentralisation and how they should ideally be designed are important subjects to be addressed by this workshop.
2. Financing system for territorial governments.
Funding schemes of territorial governments constitute a crucial issue when assessing the conduct of fiscal policy at sub national level and may significantly shape its final budgetary outcomes. In this respect, fiscal decentralisation in most Member States has been more pronounced on the expenditure side than on the revenue side. This is in line with the strong arguments provided by the theory of fiscal federalism in favour of a centralised tax collection. However, as expenditure powers of territorial entities are enhanced, the asymmetry between spending and revenue decentralisation can give rise to "vertical fiscal imbalances", whereby sub national governments tend to rely increasingly on transfers from central government to finance their expenditure. These transfers and grants may create the perception that local public spending is funded by non residents, weakening spending discipline and public policy cost awareness. Overall, in a context of limited spending decentralization, specific territorial taxes accompanied by an adequate system of transfers from central authorities can function satisfactorily. In contrast, when expenditure decentralisation grows above certain thresholds and is linked to important spending functions like health, education and social welfare, regional and local spending should preferably be financed by solid tax bases, such as income taxes and the VAT. However, the degree of tax autonomy that can be offered to territorial governments on these tax bases appears limited. The VAT is subject to EU regulations while territorial competencies on income tax rates should be applied carefully in order to avoid tax competition among jurisdictions, inefficient labour allocation and a weakening in the redistributive role that this tax instrument plays in a majority of EU countries. Current developments in EU countries point to a more intensive use of tax sharing schemes, with limited tax autonomy. Yet, the use of this arrangement for financing territorial entities is also problematic in several aspects. While tax sharing may also weaken the perceived link between expenditure and financing at territorial level, the revenues of lower levels of government are more dependent on choices made by a higher government tier, reducing thereby accountability. Furthermore, tax sharing mechanisms based on VAT or income taxes are likely to introduce a pro cyclical bias in the conduct of regional and local fiscal policy.
In most EU countries, the functioning of funding schemes for territorial governments is complemented by redistributive income mechanisms across regions and municipalities, which seek a more equal distribution of resources throughout territories. While these mechanisms may play an essential role in ensuring the provision of some basic public services and can be justified on the ground of equity reasons, they may also introduce significant distortions and hamper growth prospects by negatively affecting the allocation of resources.
Against this backdrop, the workshop will also focus on the financing side of fiscal decentralisation by addressing important questions related to funding schemes of territorial entities and the associated equalization systems among regions and municipalities. Relevant questions in the design of financing systems for territorial governments are: which features are more relevant so as to promote fiscal joint responsibility and avoid vertical imbalances? What degree of fiscal autonomy may be more appropriate and feasible taking into account the level of spending decentralisation and the necessity to avoid harmful tax competition among territories? What characteristics and limits should equalisation schemes incorporate in order to avoid distortions in the allocation of resources and be more growth friendly? What could be the most effective conditionality in terms of fiscal discipline requirements accompanying funding and redistributive mechanisms?
3. The potential role of EU policies in supporting fiscal discipline at EU level.
Despite its overall limited size, the European budget and its associated transfers stemming from the different EU policies may have a significant impact on some EU territories as a percentage of their regional GDP. In contrast to the prevailing situation some years ago, in which the predominantly subsidy oriented Common Agricultural Policy (CAP) was the largest expenditure item, spending on growth and employment policies currently constitute the most important expenditure heading in the EU budget. Thus, some EU funds, such as the structural and cohesion funds, have been playing a growing role in the implementation of regional and social policies over the latest years by supporting redistributive and growth oriented initiatives and as catalyser of development regional policies and improved practices.
At present, regional and local governments are being severely affected by the economic recession and the sovereign debt turmoil. This is leading to serious territorial sectoral shocks and causing a decline of funding, which in turn is compromising the fulfilment of territorial authorities' policies and responsibilities (including those destined to mitigate the crisis) and giving rise to growing budgetary imbalances. The policy responses of territorial entities cannot be ignored due to their overall impact on the economic and budgetary situation. On the one hand, regional and local entities have an increasing role in providing public services and their share over total public investment has significantly been increasing over the last years. On the other hand, their influence on the final budgetary outturns of the general government sector has also gained weight and any consolidation strategy for public finances has necessarily to count on the lower levels of government to ensure a successful fiscal retrenchment.
In this context, the workshop should also explore to what extent the EU funds may help mitigate the effects of the crisis on the availability of resources of territorial government budgets while being supportive of fiscal discipline. In particular, may European funding act as a bridge for regional and local governments to encourage budgetary consolidation and simultaneously provide more fiscal space to sustain growth oriented expenditure such as public investment? How can the macroeconomic and fiscal conditionality to grant resources from EU funds to territorial authorities in the next Multi annual Financial Framework of the EU be better designed?
In order to organise this workshop, the Commission invites those researchers, academics and policy makers interested in this event to submit their contributions addressing the above described topics.
General information and conditions
It is expected that 6 to 8 papers are to be presented the day of the workshop, followed by the comments of discussants and a general exchange of views among the participants.
The final papers will have to be original work created in response to this call for papers and should be about 15,000 to 20,000 words in length.
Selected authors will be required to electronically send a fully developed version of their paper to DG ECFIN by 15th October 2012 and to present it at the workshop on 27th November. The final version of the paper should be submitted electronically by 31st January 2013.
In accordance with the conditions of the purchase order, the Commission intends to pay a fee of € 4,000 per paper and to arrange travel and accommodation as well as to provide a daily allowance for one speaker per paper to present it at the workshop in Brussels, irrespective of whether the paper is authored or co-authored. The travel and accommodation arrangements will be made via a travel agency, acting on behalf of the Commission.
Candidates are invited to submit extended abstracts (up to 1,500 words) of research proposals related to the above mentioned topics. Papers can be co-authored (proxy form co-author).
Extended abstracts should be submitted together with
• a curriculum vitae of the (co-) author(s)
• a list of publications of the (co-)author(s)
• signed proxy form(s), in case of co-authorship
to the emailECFIN-FISCAL-FEDERALISMemail@example.com, clearly mentioning the topic of the paper in the subject line of the email. The above mailbox is reserved solely for submissions. Submissions sent to other mailboxes or to Commission staff cannot be accepted. No other communication should be addressed to this mailbox.
Deadline for submission: 22 June 2012 (23:59 CET)
The award criteria for evaluating the submitted research proposals are as follows:
• clarity of the submission in: (i) outlining the topic, (ii) identifying its theoretical foundations and/or the empirical techniques to be used for analysis, as appropriate, and (iii) specifying its policy implications,
• scientific standard: quality of the submission in terms of its potential to provide robust economic analysis and value added vis-à-vis existing academic literature;
• value to policy making: relevance of fiscal policy implications of the proposed research in the European context;
• excellence of the (co-)author(s): research excellence demonstrated by academic achievements (i.e. track record of their published research on related issues in leading journals)
• relevance of the subjects addressed: potential for a fruitful exchange of views among the workshop participants.
The submissions will be evaluated and ranked with a view to select about 6 to 8 proposals. The selection procedure is expected to be completed by end July 2012. Candidates will be informed in due time of the outcome of the procedure.
Publication and copyright issues
Copyright will be governed by the provisions specified in DG ECFIN’s Special Conditions attached to the purchase order. Conditional on quality, papers contributed to the workshop might be published in a volume collecting the workshop proceedings. The Commission will retain the copyright.
For any additional information please contact
o Joaquim Ayuso Casals, e mail: firstname.lastname@example.org, tel. +32-2-2.95.07.29
o Matteo Salto, e mail: email@example.com , tel. +32-2-18.104.22.168