Territorial Fiscal Self-Rule
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As a topic of public finance, territorial fiscal self-rule addresses the most decisive territorial fiscal balance point, in which so-called internal own revenues – i.e., a narrow subset of own revenues – back the spending needs derived from assigned functional responsibilities upon which the substate unit has real policy decision-making.
The concept of territorial fiscal self-rule (TFSR) differs from its closest cognates, such as fiscal federalism, fiscal decentralization, or financial autonomy. It is not burdened by the “federal bias” as the first concept is, nor distracted by the discussion whether “decentralization” encompasses deconcentration or other kinds of decentralization (political, administrative, and electoral) as in the second concept, nor is TFSR centered exclusively around the tax domain as in the third cognate concept. It is also not equal to the concept of “regional economic self-rule” (Sorens 2014), because TFSR’s concern with the functional side is not reduced to economic affairs and, as will be shown below, gives some specific transfers a decisive role in achieving territorial self-rule. In any case, TFSR is not interested in whether the territorial fiscal arrangement of a country leads it towards market economy (Weingast 2014), liberalism, or, for that matter, towards democracy (but see Breton 1993).
While TFSR is not about the major issue of the “vertical structure of power” (Breton 1993), TFSR absorbs, in a condensed way, decisions taken upon this structure of power. In other words, TFSR not only relates to pure financial issues but also to the material side implied in functional (Bird 2005) or sectorial responsibilities, thereby considering the territorial organization and structure of the state, and the alternative regimes that regulate the relationships between financial issues and the material side. These different regimes also encompass the possibilities of substate units to override mechanisms that may limit their revenue and spending power, acknowledging the fact that to have no limits at all does not seem plausible.
In line with many scholars, the TFSR approach endorses the critique of how pointless it is to merely count revenues or spending amounts in substate units’ hands relative to the total revenues or expenses of the whole public sector, without asking how much discretion these units really have upon their fiscal arrangement (Stegarescu 2005: 302; Hooghe et al. 2008: 127; Sorens 2014: 244; Gemmell et al. 2013: 1918). In contraposition to current approaches, however, TFSR first decouples fiscal self-rule from its anchoring mainly upon the tax capacity of territorial entities, and more specifically, upon own-source revenues. Second, the concept of TFSR is systematically linked to considering the domain of functions or “programatic autonomy” (Sorens 2014: 244) and asks, in a principled manner, how far is the authoritative reach of the territorial entities’ decision-making over these functions. Third, the dimension of functional responsibilities is understood as something underlying, but not collapsing with, the spending side, which in itself has to be integrated into the concept of TFSR along with the revenue side. Fourth, based on these premises, TFSR is broken down into different types, built in search of the setting in which some kinds of own revenues match the domain of functional and spending responsibilities upon which the territorial entity has real decision-making.
Decoupling TFSR from Tax Power and Own-Source Revenues
TFSR is based on the category of territorial own revenues, whereby taxes directly applied by the corresponding territorial entity – in spite of all the positive incentives that they may trigger in terms of allocative and productive efficiency (Slack 2017: 3) – are only part of a multitude of resources that also confer some degree of fiscal freedom to the territorial substate unit and that are not absolutely bereft of incentives in terms of allocative and productive efficiency. The backbone of territorial own revenues are unconditioned resources. These are those, whose sectorial destination is not predecided through a territorial authority other than the one exercising the corresponding spending power. Since the criteria of unconditionality builds upon the silence on the part of the granting territorial entity concerning the sectorial destination of territorially granted resources, the definition of unconditioned resources endorsed here is not based (but see Yilmaz et al. 2012) on the rule-driven quality of allocation of such resources, nor on the use of objective parameters that define the criteria for their territorial imputation. Moreover, unconditioned resources should not be confused with resources of a general purpose (but see Stegarescu 2005: 309). The “general purpose” relates to the roles that revenues may play (other roles being lowering disparities, capturing externalities, to name a few) in the whole system of revenue assignment, whereas “unconditioned” relates to the quality of resources. Therefore, unconditioned recourses may finance equalization systems, thus ruling out their role as a means for backing general purposes of the territorial entity. In the opposite case, namely, conditioned resources, the predetermination of the sectorial destiny on the side of the granting entity may be broad (i.e., so-called block grants) or narrow, and the fulfillment of this destination is expected to be verifiable by the entity granting the resources to the executing substate unit. Because here the definition of conditionality is mainly linked to the sectorial destination of territorial resources, it does not encompass – as is usually the case in mainstream literature – several exigencies that may accompany the transfer of resources such as matching grants, administrative skills on the side of the recipient, or the presence of some socioeconomic indicators that qualify a recipient for these transfers. To understand the complete idea of TFSR, it is also important to underscore that conditionality ends when beyond the assertion of a sectorial destiny for granted resources, the granting entity interferes in operational and concrete processes implied in the expenditure dynamic through commands directed towards the recipient entity. If this were the case, not conditioned, but the even more constraining category of territorial heteronomous resources emerges.
According to all these premises, even transfers may count as part of own revenues of territorial entities if these transfers have the quality of unconditioned resources. It does not matter, in this context, whether transfers are classical ones (meaning already budgeted resources stemming from an upper territorial level), or transfers accruing to substate units following constitutional mandates that rule the apportionment of resources to the substate domain without intermediation of any previous politically bargained annual territorial current budgets.
Assuming the idea of own revenues based on unconditioned resources broadens the scope of the substate’s fiscal self-rule in comparison to the strong tradition of scholarship in fiscal federalism to focus on own-source tax revenues as the reference for virtuous territorial revenue (so Slack 2017: 12). Some authors concede that “general purpose grants” may be classified as “own or free revenues”, but are reluctant to base any kind of “financial autonomy” on them (Stegarescu 2005: 309). The view presented in this entry forces the observer to methodologically break down different components of territorial resources (own sources taxes being only one of them), to rescue unconditioned resources by contrasting them stronger against conditioned ones (Ladner et al. 2016: 327), and to scrutinize these unconditioned resources in order to determine the varying degrees of influence (Hunter 1977) recipient territorial entities may exert upon the revenue assignment process in the state. The fiscal space of substate units expands to the extent that this influence becomes more decisive. Under some circumstances, the influence may even affect the amount of resources allotted, as may be the case when territorial entities bargain tax sharing quotas (Stegarescu 2005: 308; Gemmell et al. 2013: 1920). In other words, the phenomena of unconditioned resources seems to imply more than simply a future non-constrained sectorial spending, namely something that may even reach the generation of resources.
It could be argued that relying on this understanding of own revenues, which includes tax sharing, overlooks that the national level may behave strategically, frequently bringing the whole system of territorial revenue assignment into instability. However, taking a look at the historical records of several federal countries that over decades have financed their respective equalizations systems through unconditioned resources (Bird 2005), it becomes clear that a central government committed to steady unconditioned transfers is possible. To be sure, this stability is more likely the more such agreements are constitutionally entrenched, and the more the corresponding society has a tradition of “legal culture”.
The Rationale of TFSR
Drawing on the idea of own revenues, as those whose backbone are unconditioned resources, redirects the attention to the pragmatical needs of territorial entities to cope with their responsibilities with varying degrees of freedom, away from lamenting over the difficulties to match spending responsibilities only or mainly to own-source revenues. Thus, the question now is how territorial own fiscal decision-making may be achieved to different degrees even under circumstances of weak own-source revenues, and how a package of functional responsibilities can be assumed, differentiating those, whose content is decided at the substate domain; from those whose content is decided in an upper territorial level but the executing substate unit is free to administer the operational details; and from those upon which the upper level has both policy and administrative command upon the responsibilities delegated to the substate unit.
The System of TFSR
As has already been suggested in recent literature on fiscal federalism and fiscal decentralization, the concept of TFSR also insists in considering both sides – revenue and spending – for approaching this topic more systematically (Gemmell et al. 2013: 1922). If necessary, “autonomy to borrow” and “budget autonomy” could be ascribed respectively to revenue and spending sides of TFSR. For assessing the degree of TFSR an evaluation of the quantitative magnitude of the different kinds of revenues that underlie TFSR, relative to the whole aggregation of territorial revenue available, is advisable (Ladner et al. 2016: 327; Stegarescu 2005: 309). Having said that, distinguishing specific types of TFSR starts by marking out in which fields the respective territorial entity enjoys a real capacity of policy-making, or in other words, “policy scope” (Hooghe et al. 2008: 126). In general terms, this capacity is best approached by simply asking where can the entity legislate, whereby legislation is narrowly understood in the sense of “primary legislation” (Baldwin 2003). Alternative terms such as “authoritative decisions” (Hooghe et al. 2008: 126), or “independent … decision making” (Ladner et al. 2016: 332) are not clear enough for the purpose here. Both terms can be applied to situations in which substate units are free from administrative supervision from an upper level, but are still unable to make decisions on policy. Because legislative capacity, in the sense of primary legislation, is normal in composite states – such as federal ones – as here substate units of the intermediate level enjoy true legislative capacities, the idea of TFSR applied to simple states demands closer clarification. With regards to simple states – conventionally known as “unitary” ones – one can substitute the demanding parameter of primary legislation with rulemaking of a general scope, despite the fact that the latter are rules below the scale of primary legislation.
Same Territorial Fiscal Balance with Counterintuitive Ratios of TFSR
The Vertical Dimension of TFSR
The approach entailed in the concept of TFSR includes taking the fact into account that fiscal self-rule at the scale of each territorial entity is one thing, and another thing is the manifestation of TFSR considering whole territorial levels (Bird 2005). What each single territorial substate unit may receive in the form of revenues is often mediated by huge processes of revenue distribution that previously occur among territorial state levels. The prospects of territorial fiscal self-rule of each single entity may be thus partially prefigured in the way large masses of tax revenues are apportioned among levels before each entity gets its specific lot. Likewise, responsibilities are actually often distributed in the constitution, whereby whole packages of sectors are assigned per level.
The Structural Dimension of TFSR
Depending on the territorial state form, territorial entities belonging to a respective territorial level possess diverging prospects of TFSR. In composite states, such as federal ones or so-called autonomic states like Spain or Italy, the predominant role of the intermediate level, under which the municipal level is made invisible, may trigger decisive constraints on the pattern of revenue assignment. Thus, the constitutional framework may not only influence TFSR because of being the mechanism through which responsibilities are assigned, or because in it lies one of the main sources for institutional predictability and constraint upon the national level to abide fiscal agreements, but because of the impact the state form itself exerts upon the revenue assignment system. The territorial state form influences, for instance, the status of major cities and their financial strength (Slack 2017: 4).
The concept of TFSR entails a systemic view of the different ways and patterns of substate units’ financial capacity for coping with their responsibilities, provided some degree of fiscal decisional freedom is detectable. It is distinguished from related concepts such as financial autonomy, fiscal federalism, and fiscal decentralization; because it is nonfederal-biased, it has a more realistic stance concerning own-source revenues, and it systematically considers regimes of state authority that link different components of revenues and spending to the distribution of functional and spending responsibilities. Future research may enhance this approach by increasing the supply of data covering details on the real decision-making power upon responsibilities (Stegarescu 2005: 326), and details concerning the costs implied in each functional responsibility.
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