Less than you thought: the fiscal autonomy of sub-central governments

Abstract

One of the most frequently used indicators to assess fiscal power of sub-central governments is the share of sub-central to total tax revenue. But this indicator says nothing about the true discretion sub-central jurisdictions have over tax rates and the tax base, and it skips revenue from intergovernmental grants entirely. The main purpose of this paper is to develop and analyse a set of more refined indicators that assess the true power sub-central governments have over fiscal resources. In sum, fiscal autonomy is considerably lower than simple ratios suggest: About 60 percent only of own tax revenue is under full or partial control of sub-central governments, and again 60 percent only of transfer revenue is unconditional. Moreover, much sub-central tax revenue emanates from mobile income taxes and is prone to tax erosion. Whether and how fiscal autonomy affects outcomes such as public sector efficiency, equity in access to public services or the long term fiscal stance remains yet open, but the new database can be used for more conclusive policy analysis.