TOWARDS A MORE EFFICIENT AND RESPONSIBLE FINANCING MECHANISM FOR - - PowerPoint PPT Presentation

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TOWARDS A MORE EFFICIENT AND RESPONSIBLE FINANCING MECHANISM FOR - - PowerPoint PPT Presentation

Nov 21, 2022 50 likes •261 views

TOWARDS A MORE EFFICIENT AND RESPONSIBLE FINANCING MECHANISM FOR THE BELGIAN FEDERATION FOR THE BELGIAN FEDERATION Dirk Heremans Dirk Heremans Theo Peeters Annelore Van Hecke Introduction Evaluation of the Special Finance Act (SFA) for

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TOWARDS A MORE EFFICIENT AND RESPONSIBLE FINANCING MECHANISM FOR THE BELGIAN FEDERATION FOR THE BELGIAN FEDERATION

Dirk Heremans Dirk Heremans Theo Peeters Annelore Van Hecke

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Introduction

 Evaluation of the Special Finance Act (SFA) for the

Regions and Communities (R&C) in Belgium

 SFA refers to traditional criteria from normative theory of  SFA refers to traditional criteria from normative theory of

economic federalism

 New insights from political economy approach point at

inefficiencies in the present SFA and designate the direction of reform taking into account aspects of efficiency accountability reform, taking into account aspects of efficiency, accountability and transparency

 Proposal for an improved New Special Financing  Proposal for an improved New Special Financing

Arrangement (NSFA)

 Focus on responsibility via direct budgetary returns, giving the

right incentives to regional governments to pursue activity h i li i enhancing policies

 Key for a win-win reform improving public finance for all federated

entities and for the federal government

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Overview of the presentation

1. From normative fiscal federalism… 2 t liti l h 2. …to a political economy approach 3. The Belgian Special Finance Act (SFA)

  • O

i

  • Overview
  • Critiques
  • Points of action
  • Points of action

4. Proposal for an improved New Special Financing Arrangement (NSFA) Financing Arrangement (NSFA) 5. The NSFA in action 6 Final comments 6. Final comments

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  • 1. Normative fiscal federalism

Allocation of competences: centralization vs decentralization

HETEROGENEITY OF PREFERENCES/NEEDS Small Large Small DEMOCRATIC POLITICAL ACCOUNTABILITY E C O N E X Small LOCAL O M I C X T E R N REGIONAL S O F A L I T NATIONAL S C A L I E S EUROPEAN CENTRALIZATION E Large CENTRALIZATION

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  • 1. Normative fiscal federalism

FUNDING OF REGIONS Decentralized Centralized Externalities and ffi i di t ti Decentralized Centralized Preference-matching Equivalence Principle efficiency distortions:

  • vertical

horizontal Equivalence Principle

  • horizontal

Redistribution and lid it solidarity concerns Vertical Fiscal Gap

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  • 1. Normative fiscal federalism

Size of the vertical fiscal gap in federal states

Share in general government spending Share in general government revenues Fiscal gap Intermediate level Local government Intermediate level Local government Intermediate level Local government Austria 17.2 14.6 10.6 15.0 38.4

  • 2.7

Belgium 23 2 13 8 9 0 7 3 61 2 47 1 Belgium 23.2 13.8 9.0 7.3 61.2 47.1 Canada 50.4 10.5 42.8 9.8 15.1 6.7 Germany 21.6 14.9 23.6 11.9

  • 9.3

20.1

Source: OECD, 2007: numbers of 2005

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SLIDE 7
  • 1. Normative fiscal federalism

FUNDING OF REGIONS Decentralized Centralized Decentralized Centralized Preference-matching Equivalence Principle Fiscal equalization reduces tax externalities Equivalence Principle Need for more fiscal autonomy Need for more fiscal autonomy (Close the vertical fiscal gap)

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  • 2. Political economy approach

Benevolent social Self-serving planner politicians Political agency S l ti g y problems Solutions

 YARDSTICK COMPETITION  POLITICAL ACCOUNTABILITY

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  • 2. Political economy approach

YARDSTICK COMPETITION?

  • Requires decentralization
  • Requires fiscal transparency

POLITICAL ACCOUNTABILITY? Chequebook federalism &

  • Requires financial

responsibility (and Chequebook federalism & soft budget constraints stimulate moral hazard p y ( thus tax autonomy) problems (common pool problem, fiscal illusion, b il t bl ) bail-out problems)

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3.The Belgian SFA: overview

Regional taxes; 20.14% VAT t t

Composition of R&C revenues

VAT grant to Communities; 32.55%

Limited regional tax autonomy

PIT grant to Regions; 21 98%

autonomy

21.98% Solidarity for Regions; 2.57% Specific purpose PIT grant to Communities; 14.39% Specific purpose grants to Regions; 5.37% p p p grants to Communities; 2.99%

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3.The Belgian SFA: overview

COMPOSITION OF R&C REVENUES % of total R&C revenues Vertical evolution Horizontal division key Regional taxes 20.14% / / PIT grant to the Regions 21.98% Lump sum payment, tied to CPI and GDP-growth Relative contribution to federal PIT revenues Solidarity Yearly calculated lump Underperformance w.r.t. y (Revenue equalization) for Regions 2.57% Yearly calculated lump sum payment p national average of per capita PIT revenues Miscellaneous specific purpose grants

  • to regions
  • to communities

8.37%

  • 5.37%
  • 2.99%

Constant or linked to CPI Division keys based on expenditures in the past L t R l ti t ib ti t PIT grant to the Communities 14.39% Lump sum payment, tied to CPI and GDP-growth Relative contribution to federal PIT revenues Lump sum payment, Relative number of school VAT grant to the Communities 32.55% y tied to CPI and evolution of number

  • f people younger than 18

Relative number of school- aged people (6-17 years)

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  • 3. The Belgian SFA:critiques

ANALYSIS OF THE BELGIAN SFA

 NO ACCOUNTABILITY: no straightforward link between a

region’s performance and its financial means because of region s performance and its financial means, because of

 Vertical externalities

  • Volume of grants from federal government to R&C depends also on

performance of other regions p g

  • No true shared tax: elasticity effect larger than one benefits the federal

government

 Horizontal externalities

  • Volume of grants to a region depends on relative performance, and so on
  • ther regions’ performances

 Solidarity overcompensates ‘juste retour’, inversion of per capita means  Development trap  Development trap

  • Economic catch-up of poorer regions leads to losses in financial means of

these regions  NO TRANSPARENCY  NO TRANSPARENCY

 Complex rules, fictitious links to particular taxes  Combined system of funding and (implicit) equalization

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  • 3. The Belgian SFA: points of action

IMPROVEMENTS TO BE MADE

1) Reduce the fiscal gap by more own tax revenues for

 Improve visibility, transparency and accountability of

) g p y the federated entities Improve visibility, transparency and accountability of government actions

 Provide tax instruments for economic policy

competences <> reliance on subsidies competences <> reliance on subsidies

 Give the right incentives for activity enhancing policies

Take care of

 Potential negative (horizontal) fiscal externalities  Interregional redistributive concerns  Interregional redistributive concerns

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3.The Belgian SFA: points of action

2) Design a better incentive compatible solidarity mechanism at the horizontal level

More transparent expression of loyalty between

More transparent expression of loyalty between regions in a federation

Put an end to the increasing solidarity grants coming from the federal budget, creating room to meet the rising costs of an ageing population

Better suited to internalize tax externalities

Better suited to internalize tax externalities

Eliminate the “development trap” for regions which are recipients of solidarity grants p y g

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  • 4. Proposal for an improved NSFA

Own regional taxes

SFA NSFA

Own regional taxes VAT grant to Communities True shared tax: fixed percentage of federal VAT revenues PIT grant to Regions Solidarity grant to Regions Own regional PIT % tariff on federal defined tax base y g g PIT grant to Communities defined tax base Horizontal solidarity transfers to guarantee 95% of average per capita Specific purpose grants

  • Radio and television license fees
  • Allocation for foreign students
  • Grants for unemployment relief works

PIT revenues to each Region ~ ‘Finanzausgleich’

  • Grants for unemployment relief works
  • Other

Specific purpose grant for Brussels

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  • 4. Proposal for an improved NSFA

 Transition period: At the start of the system, each Region

and Community is guaranteed at least the financial resources it is entitled to under the current SFA resources it is entitled to under the current SFA

 The own PIT is collected by the Regions, which transfer

part (e.g. 40%) of it to the Communities (80/20 division k f B l ) key for Brussels)

 Extra compensation for Brussels for the burden as

federal capital? p

 Part of PIT of commuters?  Other options, e.g. regional production tax  Don’t subsidize but tax congestion (also beneficial for

Don t subsidize but tax congestion (also beneficial for employment of people living in Brussels)

 Own regional taxes (per capita) are much higher in Brussels due

to its function as capital (see further)

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  • 5. The NSFA in action

Flanders (incl. Financing of the R&C, 2005 (in 1000 €)

9,000,000

  • Flem. Comm.)

Wallonia

5 000 000 7,000,000

Transfer from Brussels

Wallonia (incl.Fr.Comm.)

3,000,000 5,000,000

Solidarity grant Revenues from PIT

Brussels

  • 1,000,000

1,000,000

SFA NSFA gence SFA NSFA gence SFA NSFA gence S N NSFA converge S N NSFA converge S N NSFA converge

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  • 5. The NSFA in action

Funding of REGIONS: Budgetary means per capita in 2005 in €

1400 1600 1800 2000

Region of Flanders Walloon Region BCR

800 1000 1200 1400

Own regional taxes Total PIT revenues

200 400 600

S F A N S F A A c

  • n

v e r g e n c e S F A N S F A A c

  • n

v e r g e n c e S F A N S F A A c

  • n

v e r g e n c e N S F A c N S F A c N S F A c

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SLIDE 19
  • 5. The NSFA in action

Funding of COMMUNITIES: Budgetary means per capita in 2005 in € French-speaking

1600 1800

Flemish Community French-speaking Community

1000 1200 1400

VAT grants

400 600 800

g Total PIT revenues

200

S F A S F A n c e S F A S F A n c e S F N S F N S F A c

  • n

v e r g e n S F N S F N S F A c

  • n

v e r g e n

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  • 6. Final comments

 Guarantee of the same amount of financial means at the

start of the NSFA: the consolidated entity Wallonia- French-speaking Community should be compensated at the start

 Transition scenario: as regions proceed in creating

additional employment, they may be granted gradually in additional employment, they may be granted gradually in anticipation some of the benefits that activity convergence will bring along (see graph)

 Activation of the labour force and convergence could be  Activation of the labour force and convergence could be

stimulated by additional regional labour market policies (e.g. bonus-malus system) but only during the transition phase => such grant system should be gradually phase => such grant system should be gradually replaced and sustained by additional PIT income

 By giving the right stimuli for activity enhancing policies,

th NSFA h ld l d t i i it ti f ll the NSFA should lead to a win-win situation for all regional governments ánd the federal government

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  • 6. Final comments

Flanders (incl.

8,500,000 9,500,000

  • Flem. Comm.)

6,500,000 7,500,000

Straight lines f t d th

Wallonia (incl. Fr. C )

4,500,000 5,500,000

refer to revenues under the SFA Dashed lines refer to revenues under the

Adjustment path

Comm.)

2,500,000 3,500,000

NSFA The dotted line indicates the adjustment path for Wallonia (incl

BCR

500,000 1,500,000

path for Wallonia (incl. Fr.Comm)

Current situation Convergence scenario