Fiscal Powers to Subnational Governments: Reassessing the Concept of Fiscal Autonomy

Abstract

Fiscal autonomy is understood as a type of funding arrangement that awards subnational governments more discretion over the allocation of funds and, therefore, the choice of public policies. From this concept a series of expected (positive and negative) effects on local governance is predicted by theories. However, the adopted assumption that once local governments have autonomous sources of revenue, they will necessarily have autonomy on the spending-side is false and leads to misleading conclusions. The article presents an empirical application of subnational revenue arrangements in the case of Brazil operationalized in two different ways: one following current methodology and another taking into account rules that limit decision-making autonomy to spend. Results are strikingly different and, it is argued, are not a simple matter of classification but indeed of theoretical validity.

Keywords:

• fiscal autonomy
• subnational governments
• decentralization
• decision-making authority

Acknowledgements

A preliminary version of this paper was presented at the Seminar ‘UK–BR: Exchanging Data and Skills on Place Inequality’, organized by the Institute of Governance (The University of Edinburgh) and the Centre for Metropolitan Studies (Brazil). I am grateful for comments and suggestions made by the participants of the seminar. I would like to thank Marta Arretche for her insightful comments on this paper. I would also like to express my appreciation to Hansjörg Blöchliger for kindly sending me the original data files used in his article and José Roberto Afonso and Sol Garson for clarifying data information for Brazil. Finally, I would like to acknowledge the two reviewers of Regional & Federal Studies for helpful comments and suggestions made.

Notes

National Accounts (NA), the European System of National and Regional Accounts (ESA), the Government Finance Statistics (GFS), the Revenue Statistics (RS), the Council of Europe (CE) and the IMF Government Finance Statistics.

In the original article this category was named ‘tax sharing’. Later, the author changed it to ‘redistributive’.

The Fund for Primary Education and Teacher's Wage Spending (FUNDEF, in Portuguese) was in force between 1998 and 2006 and stipulated an automatic 15% retention of some subnational revenue—including own-tax revenue—that would form a fund in every state. The retained amount was then returned to states and their respective municipalities based on the number of students enrolled in municipal or state-level schools (both coexist in Brazil). For the purposes of this article, it is important to say that some governments will ‘contribute’ more to the fund (15% retention) than ‘receive back’—say, for example, because the number of students is small—producing a loss of revenue. The same can occur in reverse: some governments will ‘contribute’ less to the fund and will ‘receive’ back more, generating a surplus of revenue. It is this final redistribution that is missing from my estimates. This means that my estimates of municipalities' and states' revenue—when presented separately—is conservative because in some cases part of the revenue might have been in fact transferred to another government level and, likewise, some governments might have received extra revenue from the Fund. However, when total subnational revenue is calculated this error disappears as it is contained inside the 25% compulsory spending on education.

See note 3 for more details.

See Tesouro Nacional (www.tesouro.fazenda.gov.br).

Other national regulations limit even more the ‘autonomy’ of spending. For example, the federal Fiscal Responsibility Law (LRF, in Portuguese) since 2000 stipulates a series of rules concerning the control of public spending, such as ceilings on public personnel spending and public indebtedness in relation to revenue for all subnational governments (states and municipalities).

The federal district is an exception as there are no municipalities.