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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Austria 2005 published 31 May 2005.
How can revenues be allocated more efficiently across governments?
The Constitutional Convention (Österreich Konvent) has recently fostered debate on constitutional reform, inter alia with respect to improving fiscal federal relations. Sub-central levels of government rely largely on shared taxes, for which the federal government has full legislative responsibilities, and on federal government transfers. A large proportion of municipalities’ and states’ tax and transfer revenues are earmarked to specific spending programmes, often in terms of extra-budgetary funds, and co-financing of spending items between the states and the municipalities is widespread. A complicated system of revenue redistribution reduces transparency. There is much scope to improve the efficiency of revenue allocation across governments:
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Earmarking of revenues, extra-budgetary funds and co-financing arrangements substantially increase the complexity of federal fiscal relations, raise administrative costs, introduce distortions and reduce accountability. Earmarking of revenues should be given up, and extra-budgetary funds should be fully integrated into the budget of the respective government. Co financing should be strictly limited to cases where clear externalities are present and local provision is nonetheless preferable, and be based on output rather than input indicators.
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While the system of revenue redistribution across municipalities helps to reduce the dispersion in living standards, its complexity makes the extent of compensation hard to assess, and the municipalities’ own tax revenues can be subject to very high levies. The redistribution mechanism for municipalities should be simplified and the extent of redistribution reduced. One option would be to eliminate the wide range of vertical redistribution and achieve redistribution via horizontal transfers between municipalities for each state.
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Some regional centres servicing bordering municipalities are being funded less well than other similarly sized municipalities. The provision of such services should be taken into account in the distribution of tax revenues of local governments. Demand for local services relating to education, social facilities and health care varies by demographic group. Hence, the demographic composition of the population, such as the proportions of the elderly, young children and immigrants, should be used a priori as additional criteria in determining the sharing of tax revenue of sub-national levels of government.
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Moreover, sub-national governments should rely more on tax revenues under their own control with real estate taxation a likely candidate for this purpose. To this end, valuation of real estate for tax purposes at the level of municipalities should be updated more frequently and unified across sectors in line with market valuations. At the level of the states, consideration should be given to introducing genuine taxing powers that replace the states’ levy on the municipalities. Allowing the states to incorporate a limited flat income tax component into the income tax schedule would be an option.
Composition of tax revenues of local and regional governments across OECD countries, 2002 (1)
% of total revenue
1. Federal countries to the left, unitary countries to the right. AVG is the average of the respective group of countries in the graph.
Source: OECD Revenue Statistics.
Can spending responsibilities across governments be redesigned so as to reduce the cost and improve the quality of government provided services?
Many municipalities in Austria are very small, incurring on average much higher administrative costs per capita than larger municipalities. Hence, there is a need to exploit returns to scale of community size in the provision of government services so as to control costs and debt accumulation. From an economic perspective, voluntary mergers of municipalities would be a preferable option as mergers allow the benefits of increasing returns to scale to be reaped while preserving accountability to local voters. Widening co operation between municipalities through the joint provision of services is a second option. At present, legal hurdles prevent the establishment of associations of municipalities across different states. These barriers should be abolished.
Number of municipalities by resident population
Source: Austrian Municipal Association.
Spending and debt by municipality size class
Source: Statistics Austria and WIFO.
Key areas of public sector activity are subject to joint decision making between various layers of government. This is true, inter alia, for spending responsibilities in health care and to some extent also in pension systems and unemployment-related income support. Split responsibilities across different administrations appear to seriously impede the suitable evaluation of spending programmes and programme selection. A spectacular example of the adverse consequences of the lack of integration of policies across various levels of government is the “Semmering Tunnel”, favoured by the federal government because it would make rail transport more efficient, while also increasing environmental sustainability of transport as such, but blocked by local government on grounds of local nature protection. The legal environment for large infrastructure projects should be reformed in a way which takes account of all interests involved while allocating the final responsibility to the higher government level.
Revisiting the allocation of tasks within the government sector is likely to have a large potential to improve public sector efficiency and generate sizeable savings in the general government budget. An example of the sub-optimal allocation of tasks is the health care system, where the states play a dominant role in decision making for hospital services while provision of these services is financed jointly by all layers of government and the social security system. The separation of spending and financing responsibilities has weakened incentives to achieve cost reductions, inducing states, inter alia, to maintain hospital capacity at inefficient levels. Fragmented funding responsibilities also generate incentives to shift services for patients treated by hospitals to practicing physicians and vice versa. To raise efficiency in health care provision, the federal and state governments have created a new system of health care agencies. While this setting marks progress in bringing together the various government institutions involved in financing services, the assignment of responsibilities remains largely unchanged. Financing and spending responsibilities for both the hospitals and practicing physicians should be assigned to one government institution, giving it the role of an active purchaser of health services. To this end the health care agencies could be developed further and given effective decision-making powers to terminate contracts with health care providers. An alternative option for reform would be to assign financing and spending responsibilities for both health care sectors fully to social insurance. In both cases health agencies could play an important role in capacity planning and co-ordination and quality control.
Earnings are subject to very high effective taxation once social assistance recipients take up employment, since the states reclaim the benefits paid in the past. This discourages benefit recipients from searching for a job. Reclaiming social assistance by the states needs to be terminated. Moreover, for benefit recipients who are able to work, the social assistance and unemployment assistance schemes, which are administered by different levels of government, should be combined into one means-tested income replacement scheme in order to reduce administrative overheads and facilitate better activation of the jobless. In the same vein, means testing and work availability testing should be strict.
Return to the Economic Survey of Austria 2005 homepage.
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
Ein Policy Brief auf deutsch kann als pdf Datei heruntergeladen werden. Es enthält die Gesamtbeurteilung und Empfehlungen der OECD auf den Seiten oben.
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