Political integration, fiscal decentralisation, and public sector revenue.

It should be no surprise to many that the management of public finances lays at the core of recurrent political struggles. Some political struggles should do with greater integration of communities, which are expected to pool together financial resources and concentrate decision making powers into a single political venue. Other political struggles arise from the disintegration of existing institutional arrangements, which are substituted by more decentralized or autonomous political entities.

October 2017

At the time of writing, tensions are still high in Catalonia. Apparently, more than 90% of about 2 million voters (out of more than 5 million registered electors) supported the creation of an independent state in a referendum held on 1st October, 2017. The Catalan referendum event poses several issues around the legitimacy of the vote, the constitutional prerogatives of the Kingdom of Spain to preserve the unity of the country, and the rights of Catalan people to organise forms to express their wish to gain independence from the central government. In addition, the Catalan referendum reminds us that the management of public finances across levels of government is a hot issue in industrialised as well as developing countries alike. In the case of Spain, Catalonia leaders have long argued that the region pays much more in taxes than receives from central government transfers and services. The effect, they argue, is that Catalan people get less resources per capita than other Spanish regions, regional public services and infrastructure are not properly attended, and poorer regions of the country do not seem to converge with the richer ones anyway.

Still at the time of writing, the news report that German chancellor Angela Merkel and French president Emmanuel Macron share the vision of tighter consolidation of EU public finances. The vision includes the creation of a “European Monetary Fund” that would redistribute money across the Eurozone and of a single Eurozone budget. The proposals would result in a dramatic acceleration of European Union integration on both the monetary and fiscal dimensions. The integration of EU fiscal policies into a common budget, in particular, would further reduce the fiscal autonomy of EU member states and call for far greater coordination of public finances. Not every EU member state might appreciate the advantages that arise from a more cohesive EU “block”, however. The exit of the UK from the EU, in particular, might be followed by the one of other countries that do not share the prospect of deeper integration – such as, for example, the making of the euro compulsory for all EU member states or the agreement on common tax base or rates.

The two examples are illustrative of the kind of political struggles that arise around the design of public financial management institutions. How governments raise financial resources and how they make use of them are, after all, one main component of every public policy. Defining what should be taxed and how much, who can decide the issue of public sector bonds, and how public sector revenue are redistributed across government layers are just a few among many important issues that bear important repercussions on the production and distribution of wealth in society. Yet, more should be done in order to improve the quality of the policy discussion around public financial management choices in many countries.

The recent publication from Routledge, Public Sector Revenue: Principles, Policies and Management, aims to contribute improving the quality of the policy discussion about the revenue side of public finances. The book provides an overview of alternatives mechanisms and tools that government use to raise public money – from taxation to the commercialisation of public services, from the issue of government bonds to plain money printing. The book covers contemporary tendencies in public sector revenue across many countries, also taking into account the historical origins of the current systems of taxation and other forms of public sector revenue. Findings from recent research works are reviewed in order to offer to the readers insights into theoretical arguments and evidence about “what works” in the funding of public sector activity. The book, therefore, could help participate to debates on public sector revenue policies and management in a better informed way.

Among the topics covered in the book, the issue of the fiscal relationships across levels of government is especially relevant to the examples of Catalonia and the EU. In multi-level governance systems, fiscal powers can be allocated in many different forms that are broadly located along a continuum. At one polar case, a country government retains all public revenue and spending functions. At another polar case, public revenue and spending functions are extremely dispersed across government layers. In between these cases, governments at different levels share public revenue and spending functions in various ways. For example, common sources of revenue may be apportioned across various government levels or particular levels of government may have exclusive powers to levy specific taxes.

Whether a more centralised or decentralised system of revenue allocation and management is more advantageous is controversial. Advantages of fiscal decentralisation include, for example, the possibility that at the local level policy-makers can pay more attention to local needs. Local policy-makers may adjust tax rates to local circumstances. At the local level, public officers may be held more accountable to the public because local taxpayers would have more immediate evidence of whether public sector revenue are well spent. Smaller public administrations may be more efficient than larger ones. Local taxpayers, moreover, may also relocate to other local jurisdictions if they are unhappy with the quality of public services that they receive for the taxes that they pay (although there is little evidence that individual taxpayers relocate primarily for tax reasons).

Some would argue that there are advantages from centralisation of public finances, however. Centralised fiscal policies, for example, enable the pursue of redistribution of income and wealth across a country, with the intended effect of reducing inequality and strengthening national identity. Central government bureaucracies may possess higher capabilities and skills than local ones, which may not be able to undertake complex financial and legal schemes such as, for example, public-private partnerships. Also, the centralisation of public finances prevents local governments from running deficits and inflating debts, which local governments might not be able to pay back without the bailout of central governments (or, in the case of the EU, a super-national government).

Events like those of the Catalonia vote and the articulation of visions of the public financial management of the EU in the future remind us that public financial management is a pivotal area of public policy and social affairs. Although political issues may be affected by identitarian and emotional tones, the quality of discussion about the design and management of fiscal institutions would improve if we gain a better understanding of the nature and consequences of public financial management choices. 

Dr Alberto Asquer (SOAS University of London)

  • Public Sector Revenue

    Principles, Policies and Management, 1st Edition

    By Alberto Asquer

    In this time of acute financial pressure on public budgets, there is an increasing interest worldwide in alternative ways for governments to raise money, and how public authorities can develop the capacity to administer revenues efficiently and effectively. Taxation, the primary source of public…

    Paperback – 2017-08-21

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