Transfers across levels of government are a significant share of government spending. They are also a key source of income for subnational governments, who are responsible for more than half of public investment and around a third of public expenditure. This chapter discusses reform initiatives and savings measures in this area. Governments tend to pursue multi-year restraint, indexation changes and structural redesign. Overall, the measures fall into five main reform strategies: reassigning spending responsibilities across levels of government; reducing or restructuring general transfers; adjusting fiscal equalisation arrangements; redesigning grant structures; and broader co-ordination and restructuring reforms. Examples illustrate how these strategies are applied in practice, often as mutually reinforcing packages rather than isolated measures.
Restoring Public Finances
Enabling Effective Government
Abstract
OECD countries are pursuing a combination of structural redesign and targeted adjustments to intergovernmental fiscal relations when trying to achieve savings.
According to RPF Survey results, sizeable cuts to fiscal transfers are rare. Many respondents instead seek efficiency gains and better incentive alignment. Overall, five main strategies emerge:
Reform initiatives and savings measures
1. Reassign responsibilities across levels of government
Reallocate major service responsibilities across tiers to reduce fragmentation.
Pair functional changes with financing rules to align resources with new mandates.
Strengthen delivery or co-ordination structures in high-spending services.
2. Reduce or restructure general transfers to subnational governments
Freeze or slow indexation of general grants to contain automatic expenditure drift.
Implement multi-year cuts or restraint profiles to transfer envelopes or shared revenues.
Adjust shared-tax or general-envelope parameters to tighten the intergovernmental fiscal stance.
3. Adjust fiscal equalisation arrangements
Recalibrate equalisation parameters to update fiscal capacity and needs measurement.
Restructure equalisation arrangements with transitional safeguards.
Embed equalisation changes within broader reforms of local government funding systems.
4. Redesign structure of grants to subnational governments
Consolidate fragmented grant programmes into fewer or more coherent instruments.
Expand outcome and performance elements within sectoral grants or municipal pacts.
Simplify grant structures and allocation mechanisms to reduce administrative burdens.
5. Other reforms, including co-ordination and restructuring
Establish commissions or formal review processes to prepare structural reform packages.
Reform municipal investment and co-financing frameworks to simplify transfers.
Strengthen targeted intergovernmental funding, co-ordination and resilience measures.
Subnational governments (SNGs) occupy an important position in OECD countries’ fiscal architectures. On average, they are responsible for more than half of public investment and around a third of public expenditure, making them integral to the delivery of education, healthcare, transport and social services. The structural reliance on transfers from central governments can make SNGs prominent in fiscal consolidation discussions. When central governments seek to restore public finances, transfers to SNGs are often among the largest and most visible spending items under their control.
Figure 12.1 shows central government transfers to SNGs as a share of general government spending. This perspective is especially relevant because it shows how large a role these transfers play within central public expenditure envelopes, and therefore why they frequently become part of consolidation debates. At the same time, the cross-country variation shown in the figure underlines that the room for adjustment differs considerably across OECD countries, depending on the scale of decentralisation and the structure of intergovernmental finance.
Transfers from central or national governments also represent income to subnational governments. Therefore, achieving savings on such transfers will have implications for the fiscal balance of SNGs at the local level. This interaction is particularly important at present because subnational fiscal conditions have deteriorated in many OECD countries (see Box 12.1). This makes it important to analyse transfer reforms together with the fiscal outlook of SNGs rather than in isolation. When transfers are reduced, slowed or restructured, part of the adjustment may be transmitted to SNGs, especially where spending mandates are rigid and own-source revenues are limited.
Central inter-governmental transfers to other levels of government
Note: Consolidated intergovernmental transfers originating at the central government level, to other levels of government. Chile, Japan and Switzerland data from 2023 rather than 2024. No data are available for Australia, Korea, New Zealand, and Türkiye.
Source: OECD Fiscal Decentralisation database, https://www.oecd.org/en/data/datasets/oecd-fiscal-decentralisation-database.html.
The SNG fiscal position has recently deteriorated (Figure 12.2). Between 2022 and 2024, negative shifts in SNG fiscal balances were recorded in a majority of OECD Member and accession candidate countries. Austria, Bulgaria, Finland, Germany, Korea and Sweden all recorded a deterioration in subnational balances. The United States saw a change from a surplus to a deficit in the financial position of states driven by declining pandemic-era federal transfers and rising expenditures, with interest expenses playing a growing role.
Because transfers are expenditure for central (or national) government but income for subnational governments (SNGs), savings at the centre may imply fiscal stress at lower levels. SNGs tend to adjust more pro-cyclically, particularly through investment cuts. This is an important caveat when considering savings measures on transfers across levels of government, since their net effect may extend beyond the central budget alone (OECD, 2021[1]).
Note: Median, mean, 25% and 75% percentiles of OECD countries. Deficit as a share of total SNG revenues. Calculations based on OECD National Accounts (database), Table 12 – Net lending (+) / Net borrowing (-).
Source: OECD Intergovernmental Fiscal Outlook for 2026 and 2027, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/fiscal-federalism-network/intergovernmental-fiscal-outlook-2025-2027.pdf.
The RPF Survey suggests that these pressures are being addressed through various reform strategies. Figure 12.3 summarises recent reform initiatives and saving measures as reported in the submissions. Reassigning responsibilities and reducing or restructuring general transfers are the most frequently reported reform levers, while redesign of grants, equalisation reforms and broader co-ordination or restructuring measures appear less often but remain substantively important. These will be discussed in the subsequent sections.
Measures approved or submitted to parliament for the fiscal years of 2025 and 2026
Note: Results based on 39 RPF Survey responses. “Other measures” include, but are not limited to, streamlining co-ordination and restructuring.
Source: 2026 OECD Survey on Restoring Public Finances, Question 7: Transfers across levels of Government.
12.2.1. Reassigning responsibilities across levels of government
Reassigning responsibilities is among the most frequently reported reform and savings measures in the RPF Survey (see Figure 12.3), indicating that respondents are reviewing “who does what” across levels of government. The measures may contain different objectives and mechanisms for reassignment. However, the results point repeatedly to a common consolidation logic: responsibility changes are more likely to support durable fiscal adjustment when they are accompanied by credible financing arrangements and clear accountability. When looking in more detail, the survey results show that reported measures cluster around three practical approaches:
Shifting responsibilities between municipalities and regions/central government in major services to improve integration and reduce fragmentation. Examples include Belgium where certain municipal expenses are shifted upward to provinces alongside related funding adjustments in the Walloon Region.
Transferring specific functions to municipalities with an accompanying financing model, aiming to bring services closer to citizens while strengthening incentives. Finland reports transferring employment services to municipalities with an associated financing model to incentivise efficient service provision and improve labour market outcomes.
Linking reassignment to financing-rule or tax-sharing changes, reflecting the “finance follows function” logic within intergovernmental frameworks, for instance, Czechia reports changes in the total tax-share for municipalities and regions from 2026.
In several cases, reassignment reforms are part of broader packages that include transfer reforms, grant redesign or co-ordination changes. For example, the United Kingdom is pursuing a multi-category reform (reassignment, transfer restructuring, grant redesign and equalisation), as described in Box 12.2.
Overall, the results suggest that reassignment is used less as a short-term expenditure cut and more as a means of reshaping the institutional foundations of consolidation.
12.2.2. Reducing or restructuring general transfers to SNGs
Reducing or restructuring general transfers is also frequently reported to achieve savings in the RPF Survey (see Figure 12.3), indicating that respondents are restraining the size of transfers, and modifying how those envelopes may evolve over time. Around one quarter of respondents mentioned savings measures in this category. While the measures differ in scope and fiscal significance, they indicate that governments are seeking fiscal savings through one or more of the following:
Freezing or slowing the growth of general grants, often through indexation changes or restraint in automatic updates. The result would be slower growth of transfer envelopes. Belgium reports freezing or reducing indexation for a number of municipal grants, while France reports measures that slow the growth of transfers to local governments, including through reduced compensation linked to local tax reform and changes to transfer-related mechanisms. These measures illustrate a common consolidation approach: restraining the upward drift of transfers rather than relying only on explicit nominal cuts.
Applying multi-year cuts or restraint profiles to transfer budgets. For example, the Netherlands reports a 10% cut affecting most earmarked transfers to SNGs as part of a broader multi-year simplification of grant arrangements, showing that reforms aimed at reducing fragmentation may also be combined with fiscal restraint. The Slovak Republic reports consolidation measures that include reducing the local government share in personal income tax revenue. These submissions suggest that countries are choosing staged restraint over several years rather than single-year discretionary action.
Changing financing parameters within intergovernmental frameworks, including shared-tax rules or general-envelope arrangements. This implies restructuring of the rules through which general transfers are determined. For example, Lithuania reports measures aimed at strengthening local revenue capacity and reducing transfer dependence, while the United Kingdom reports reforms to local government finance that include simplification of multiple funding streams and a broader restructuring of local funding arrangements. The measures in the United Kingdom provide a useful illustration of a wider pattern in intergovernmental reform: governments often pursue packages of mutually reinforcing measures rather than single, isolated changes (Box 12.2).
The United Kingdom reports a broad package of reforms to local government finance rather than a single isolated measure. In the survey, these include responsibility reassignment within wider local government reform, restructuring of transfers, simplification of multiple revenue funding streams and wider changes to the architecture of local government funding. This is consistent with the government’s Local Government Finance Policy Statement, which sets out the first multi-year settlement in a decade, simplification of more than 30 funding streams worth nearly GBP 47 billion over three years (about 0.5% of GDP per year), consolidation of funding into four new ringfenced grants and the Revenue Support Grant, revised allocations more closely aligned with need and tax capacity, and transitional arrangements to help authorities adjust. In the longer term, the reforms are linked to local government reorganisation aimed at reducing duplication and supporting more joined-up service delivery.
Source: United Kingdom Government.
From a consolidation perspective, reform and savings measures concerning general transfers have several attractive features, as they can:
Deliver visible fiscal restraint at the central level, especially where transfers account for a large share of expenditure.
Be designed as multi-year adjustments, making consolidation more predictable than ad hoc freezes or one-off cuts.
Combine changes in indexation, formulas or shared-tax parameters, allowing countries to reshape incentives rather than simply reduce nominal amounts.
However, consolidation through fiscal restraint of general transfers also carries risks depending on the share of earmarked transfers and the overall flexibility granted to SNGs to raise revenues and seek efficiency gains (Box 12.3).
OECD analysis suggests that abrupt reductions in transfers can weaken the fiscal positions of SNGs, especially where they have limited own-source revenue capacity or rigid spending mandates (OECD, 2021[1]). The key issue is therefore not only whether transfers are reduced, but how such measures are structured and sequenced. OECD systems differ significantly in the balance between earmarked and non-earmarked transfers (Figure 12.4). Systems with a larger general-purpose component may offer more room for prioritisation and adjustment, while those dominated by earmarked transfers may be less flexible and more exposed to service disruption when envelopes are tightened. The effects of such reforms also depend on the execution capacity of the receiving level of government, which may vary substantially across municipalities and regions.
Note: For some countries, transfers may be reported as earmarked when paid to bodies only responsible for a specific policy area(s); Transfers related to social welfare in Finland have been classified as non-earmarked to maintain consistency with SNA as reported by Statistics Finland.
Source: Dougherty, Montes Nebreda and Mota (2024[2]).
Overall, the results suggest that reducing or restructuring general transfers are used as a central-government consolidation instrument, but usually in a more calibrated way than simple across-the-board cuts. The measures reported point to a preference for multi-year profiles, changes in indexation or financing parameters, and broader restructuring of local government finance. The contribution of these measures to restoring public finances will depend not only on the central savings they generate, but also on whether they preserve the capacity of SNGs to manage adjustment without excessive cuts to investment or renewed demands for compensating support (OECD, 2021[1]).
The durability of such reforms also depends on the revenue capacity of subnational governments. OECD analysis highlights that recurrent taxes on immovable property are among the taxes over which SNGs typically have the greatest discretion, making them important for fiscal autonomy, accountability and reducing dependence on transfers (OECD, 2021[3]).
12.2.3. Adjust fiscal equalisation arrangements
Adjustments to fiscal equalisation arrangements are reported somewhat less often in the survey on savings measures than other tools, reflecting both their technical complexity and political sensitivity (see Figure 12.3). This is consistent with OECD analysis that equalisation systems are a central but contested part of intergovernmental fiscal frameworks: they are designed to reduce disparities in fiscal capacity and support equitable service provision across regions, but they also redistribute large financial flows and therefore become especially sensitive during periods of fiscal consolidation (OECD, 2021[1]).
The RPF survey responses on measures to adjust fiscal equalisation arrangements point to three main approaches:
Recalibrating equalisation parameters or formula bases, as shown in Ireland where measures are linked to local property tax retention rules. The reform suggests a focus on updating distribution mechanisms rather than making large-scale cuts. A similar logic is visible in France, where equalisation-related changes are being made within broader local government financing reforms.
Expanding or restructuring equalisation arrangements within local government funding reforms, as shown in Poland, where reforms to local government income-sharing and redistribution mechanisms form part of a wider restructuring of subnational finance.
Embedding equalisation changes within broader reforms to local government finance, as illustrated by Slovenia and the United Kingdom, where local government finance reforms touch multiple categories simultaneously.
From a consolidation perspective, equalisation reform is challenging because poorly designed adjustments can weaken both territorial cohesion and fiscal discipline. Recent OECD work shows, however, that well-designed equalisation systems can support consolidation when formulas remain incentive-compatible and institutional safeguards limit discretionary cuts (Dougherty, Montes Nebreda and Urrutia, 2025[4]). In this sense, equalisation reform is usually less about immediate expenditure reduction than about recalibrating the rules through which redistribution is organised, in ways that preserve incentives for revenue effort and cost control.
The responses to the survey are consistent with OECD findings that show that predictable, formula-based arrangements and gradual transitions are particularly important during austerity periods, when ad hoc cuts may risk widening disparities (OECD, 2021[1]). They also underline the importance of formula design that relies on standardised measures of fiscal capacity and expenditure needs, so that redistribution supports cohesion without weakening incentives for revenue mobilisation and cost control (Dougherty, Montes Nebreda and Mota, 2024[2]). More broadly, equalisation reforms are likely to be more credible when they are embedded in stronger institutional frameworks, including multi-year arrangements, clear procedures for negotiating contested changes and stronger monitoring of subnational fiscal developments (Dougherty, Montes Nebreda and Urrutia, 2025[4]).
12.2.4. Redesign structure of grants to SNGs
Redesigning grant structures is less frequently used for achieving savings in the RPF Survey (see Figure 12.3), indicating that some respondents are reconsidering not only how much funding is provided to SNGs, but also how grant systems are organised and what incentives they create. This aligns with OECD analysis showing that the design of intergovernmental grants, notably the degree of earmarking and conditionality, can affect spending efficiency, administrative costs and incentives for cost control and revenue mobilisation (OECD, 2021[1]).
From a consolidation perspective, grant redesign can often improve the quality of adjustment even where immediate savings are limited. Transfer systems involve trade-offs between equity, efficiency, transparency and autonomy, and OECD analysis documents emerging trends including performance-based grants (Dougherty, Montes Nebreda and Mota, 2024[2]). In practice, this means that redesigning grant structures can support consolidation by reducing fragmentation, simplifying administration and strengthening the link between funding and outcomes, rather than relying only on cuts to envelopes.
The RPF survey responses reporting grant redesign point to three main approaches:
Simplifying or consolidating grant programmes is often pursued to reduce administrative burden and improve coherence across multiple funding streams. The United Kingdom reforms to local government finance include simplification of multiple revenue funding streams, while in Thailand reforms aim to integrate planning and budgeting across local authorities. These measures suggest that respondents are pursuing consolidation partly through rationalising complex grant architectures.
Introducing performance or outcome-related elements into grant design has been pursued by Luxembourg, in its redesign of municipal grants. The example is consistent with a broader trend in the OECD to enhance the role of performance-based grants.
Restructuring grant systems as part of municipal or territorial funding reform is illustrated by Chile’s reforms to link municipal financing and equalisation. The survey suggests that grant redesign is frequently embedded in wider changes to local government finance rather than pursued as a stand-alone measure.
Taken together, the survey measures suggest that grant redesign is rarely being used as a stand-alone savings instrument. Instead, it is more often presented as a complementary reform to improve the efficiency, manageability and incentive structure of intergovernmental finance. This is consistent with OECD findings that reforms to transfer architecture are often best implemented as broader packages rather than isolated measures.
12.2.5. Other reform and savings measures including co-ordination and restructuring
The other responses point to a range of reform and savings measures that entail streamlining, co-ordination and restructuring. These are substantively important because consolidation success often depends on enabling institutions rather than on a single transfer parameter. In practice, this category captures reforms that improve how the system functions as a whole, including co-ordination mechanisms, investment governance, review processes and restructuring measures.
The survey responses point to three main approaches:
Launching reviews or commissioning processes to prepare for structural reform. Norway reports the establishment of a municipal commission tasked with reviewing the framework for future reform, illustrating how some countries are using institutional review processes to prepare for restructuring.
Reforming investment, co-financing or municipal income frameworks. Poland is reforming its local government income systems, while Japan and Latvia have measures that relate to specific municipal financing or resilience arrangements. These measures suggest that countries are using this category of reform to reshape intergovernmental frameworks in a manner that differs from the main transfer or equalisation categories.
Restructuring or resilience measures in specific territories or systems as shown by Austria’s reform of municipal investment transfer arrangements aimed at simplifying delivery and reducing administrative burdens, and Latvia’s measures on municipal resilience and border security.
Taken together, this category captures measures that are less about changing a single transfer instrument than about improving the wider operating framework of intergovernmental finance. Common themes include simplification, institutional preparation for larger reform, and efforts to improve the governance of funding and investment. These measures can make broader transfer, assignment or equalisation reforms more credible and easier to implement, especially where consolidation depends on better co-ordination or accountability across levels of government (OECD, 2021[1]).
Finally, digitalisation and AI-based tools can help improve forecasting, monitoring and administrative efficiency. As discussed in Box 12.4, these tools can strengthen implementation capacity and make intergovernmental systems more transparent and responsive.
AI can potentially contribute to subnational fiscal sustainability. Given the size of public expenditures, even marginal efficiency gains can yield large fiscal benefits. In terms of transfers across levels of government, the use of AI can focus on:
Enabling administrative efficiency, especially for education and health care: Productivity gains are more likely when AI adoption is supported with digital infrastructure, skills, good data quality and trust-building accountability measures – particularly at regional/state and local levels.
Transfer forecasting and scenario analysis: AI-enabled analytics can improve medium-term estimates of transfer envelopes and formula impacts, strengthen predictability and reduce the need for ad hoc in‑year adjustments.
Fiscal risk early warning across levels: AI-assisted dashboards can detect emerging stress (e.g. persistent deviations, deteriorating revenue collection) and support earlier corrective action – strengthening hard budget constraints.
Source: Dougherty, S., G. Damiani and A. Montes (2025[5]).
References
[5] Dougherty, S., G. Damiani and A. Montes (2025), “AI for public finance: Potential subnational efficiency gains”, OECD Network on Fiscal Relations across Levels of Government, Policy Memo, Paris.
[2] Dougherty, S., A. Montes Nebreda and T. Mota (2024), “Adapting intergovernmental fiscal transfers for the future: Emerging trends and innovative approaches”, OECD Working Papers on Fiscal Federalism, No. 49, OECD Publishing, Paris, https://doi.org/10.1787/6389ca23-en.
[4] Dougherty, S., A. Montes Nebreda and N. Urrutia (2025), “Intergovernmental fiscal transfers and fiscal equalisation in a time of consolidation”, OECD Working Papers on Fiscal Federalism, No. 50, OECD Publishing, Paris, https://doi.org/10.1787/4853a4d0-en.
[1] OECD (2021), Fiscal Federalism 2022: Making Decentralisation Work, OECD Publishing, Paris, https://doi.org/10.1787/201c75b6-en.
[3] OECD (2021), Making Property Tax Reform Happen in China: A Review of Property Tax Design and Reform Experiences in OECD Countries, OECD Fiscal Federalism Studies, OECD Publishing, Paris, https://doi.org/10.1787/bd0fbae3-en.