Fiscal federalism aims to achieve equitable distribution of resources across jurisdictions, thereby enhancing equitable access to public services. The configuration of intergovernmental fiscal arrangements significantly impacts the subnational government’s capacity to finance and provide public goods and services, while allowing the central government to determine the revenue composition and fiscal autonomy of subnational governments.
A recent analysis of international financial institutions in 26 OECD countries over a span of 27 years, under the title “Adapting Intergovernmental Fiscal Transfers for the Future: Emerging Trends and Innovative Approaches,” furnishes insights into the impact of intergovernmental fiscal transfers (IGFTs) on financial autonomy, fiscal imbalances, and their influence on the fiscal capacities of subnational governments.
The research highlights the crucial role of intergovernmental fiscal transfers (IGFTs) as essential mechanisms for the distribution of fiscal resources across different government levels, thereby bridging fiscal gaps, addressing externalities, and aligning revenue capacities with national priorities. The analysis underscores the necessity for grants to both respect regional autonomy and conforms to national standards, ultimately guiding local and regional governments toward priority sectors while allowing fiscal independence. Furthermore, grants serve to promote regional equity and cohesion, particularly by supporting regions facing lower economic activity or specific challenges. The significance of IGFTs is notably emphasized in OECD countries characterized by elevated levels of fiscal decentralization, diverse economic landscapes, varying developmental levels, and distinct regional challenges.
The design of IGFTs manifests a pivotal role in enhancing efficiency, accountability, and service delivery at the subnational level. Poorly designed IGFTs may engender adverse effects such as dependency, resource misallocation, and fiscal disparities. Research on IGFTs provides a comprehensive understanding of fiscal disparities, informs the design of transfer mechanisms, and evaluates the effectiveness and efficiency of fiscal transfers. As local governments attain greater autonomy and socio-economic landscapes change, the design and implementation of IGFTs must remain pertinent, responsive, and robust.
The OECD study not only offers insights into financial autonomy, fiscal imbalances, and their impact on subnational governments’ fiscal capacities but also reviews the literature on the objectives, trade-offs, and country-specific factors related to IGFTs. Additionally, it introduces a comprehensive typology of grants and discusses emerging trends in IGFTs, recommending potential reforms to render grant frameworks more flexible and performance-based.
Key Findings:
- Intergovernmental fiscal transfers (IGFTs) are instrumental in addressing vertical and horizontal imbalances, facilitating equitable service delivery, and aligning local expenditure with national priorities. However, their formulation entails navigating intricate trade-offs encompassing equity, efficiency, transparency, and autonomy.
- Recent economic disruptions, notably the COVID-19 pandemic, have had substantial impacts on the use of IGFTs. Newly compiled data reveals that transfers from central to subnational governments have escalated across all OECD countries examined, with the most marked relative surge observed in the domain of Economic Affairs, trailed by Social Protection.
- Although there have been no revolutionary shifts in IGFTs in recent years, emerging patterns such as performance-based grants, ecological fiscal transfers, associations with regional policy, and novel budgeting techniques suggest potential avenues for renovation.
- Harmonizing IGFTs with overarching policy objectives, including social well-being, gender equality, and ecological sustainability, could fortify subnational capabilities and incentives, thus contributing to the realization of international and national agendas.
Access the full publication for free on OECD’s website:
Sean Dougherty, Andoni Montes Nebreda and Tatiana Mota (2024), Adapting Intergovernmental Fiscal Transfers for the Future: Emerging Trends and Innovative Approaches, OECD Fiscal Federalism Studies, OECD Publishing, https://doi.org/10.1787/6389ca23-en
