Economic Survey - Spain 2005: Getting the most out of public sector decentralisation.


Information systems should be developed to raise the effectiveness of public spending and to support fiscal discipline

Following the rapid decentralisation to the regions since the early 1980s, the sub-national authorities now have more staff to manage than does central government and have responsibility for spending on education, the social services and health. Decentralisation has not compromised fiscal stability, and has enabled regional governments to provide better-tailored services. Nevertheless, it has also resulted in a rapid increase in government employment, and has undermined cost-effectiveness in a number of domains, creating pressures on public spending. Rapid decentralisation has, for instance, been accompanied by a fragmentation and a loss of information. It will be necessary to develop proper information systems on sub-national governments’ policies and outcomes to foster fiscal discipline. Sub-national government accounts are available only with a significant lag and the use of off-budget operations through public enterprises controlled by the regions or municipalities has expanded. In addition, although anecdotal evidence suggests that regional governments have implemented innovative policy options in some areas, in particular health care, there is a lack of consistent and reliable information on such policies and outcomes. Thus, the diffusion of best practice is limited, the lack of co-ordination between and across levels of government results in an inefficient use of public facilities, while citizens cannot easily benchmark their own governments against others and press for a more efficient public sector. The government is committed to improving the quality of information for public services – a National Agency for the Evaluation of Public Services´ Quality and Public Policies is to be created. To be effective, this agency, as others recently created (e.g. for health care or universities), should have sufficient resources and be independent from the government so as to raise acceptance and credibility. Indicators, consistent for the whole territory, should be defined and made public so as to foster benchmarking. In this context, central and regional governments’ recent agreement within the Consejo Interterritorial de Salud not to disseminate regional data for hospital care waiting lists is a step in the wrong direction.

The ongoing examination of the new financial arrangements for sub-national governments should pay attention to demographic developments

The new financing arrangement for the regions is commendable in many respects. Most importantly, it has brought the regions’ revenue-raising powers more in line with their spending responsibilities and intergovernmental transfers have been redesigned so as to mitigate moral hazard problems. It should thus contribute to secure fiscal discipline at the regional level. Although the new financing arrangement is rather recent, the government is currently assessing its implementation, and a discussion on some of its main features is underway within the Council for Fiscal and Financial Policy, where both the central government and the regions are represented. To deliver its full benefits, the new financing model should make fully operational its mechanisms to make it sustainable in the face of demographic developments, in particular immigration and the prospects of population ageing. More specifically, the financial resources provided by the new financing arrangement should follow more closely the net fiscal effect of these changes. A careful examination of the best approach to finance the likely increase in regional spending over the long term because of population ageing should be carried out, with the objectives of: avoiding large distortion associated with labour taxes; underpinning regional governments’ incentives to act in a cost-conscious way; and ensuring that regional governments’ revenue raising powers are used and adequate to deliver a sufficient standard of public services to all citizens. In addition, the redistributive bias in allocating central government investment across the regions should be reconsidered, as distributive goals can be achieved by better instruments. At the municipal level, the existence of many very small municipalities argues in favour of a cautious approach to the transfer of new spending responsibilities. Their financing should however be improved by reconsidering the local business tax, which is paid only by relatively large companies and could hinder the growth of enterprises or create a risk of tax avoidance, while increasing local governments’ reliance on the real estate tax. This would require upgrading the land and property register.

Although warranted, the reform of the Fiscal Stability Law must not undermine fiscal discipline

To maintain fiscal discipline in the decentralised framework, a Fiscal Stability Law was implemented in 2003 with the objective of keeping the accounts of all levels of government, taken individually, permanently in balance. While it has the advantage of being simple and easy to convey, this rule is nevertheless formulated in too rigid a manner and could result in fiscal policy playing a pro-cyclical role. The new government will amend the fiscal rule so as to maintain fiscal balance over the cycle, rather than in each year. Applying this principle seems relevant for central government and all the regions, given their tax and expenditure assignments. They will be allowed to post deficits during cyclical troughs but will be required to produce surpluses when activity is buoyant. In the case of the local authorities, on the other hand, changing the present system does not appear necessary because their budgets are not very sensitive to the economic situation whereas maintaining structural surpluses would be preferable in the case of the social security system. The specific sharing of overall fiscal targets between the different regions needs to be based on a consensual approach of collective surveillance so as to avoid having to resort to sanction mechanisms which appear difficult to implement. It would nevertheless be worthwhile continuing to require the regions to present a medium-term fiscal adjustment plan in the event that they significantly miss their targets. It is vital to ensure that the new norm does not de facto weaken fiscal discipline and that it is applied equitably to all the regions, whatever their size.

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