crisis. Since 1992, this trend has been reversed, progressively greater fiscal autonomy has
been granted to sub-central governments, and has been accompanied by a corresponding
reduction in transfers. Between 1993 and 2000 a number of different tax reforms have been
introduced, involving experimentation with various types of sub-central taxation, ranging
from health taxes to a tax on business value added (IRAP)10 and an income tax (IRPEF)
surcharge.
Despite this, vertical transfers through conditional grants are still an important feature of
Italian public finances. One problem that has emerged in Italy is a clear tension between
equity and accountability when spending functions relating to key public services have been
devolved. The main areas of tension have been in health and transport, where the regions
have key responsibilities for delivering services. Regional governments which overspent their
budgets in these areas were effectively bailed out by central government. Thus, the system of
vertical transfers rewarded high and inefficient sub-central governments. (To date, despite
reforms in 1993 and 2000, the Italian government has found it almost impossible to reform
the allocation of central grants to reflect objective factors rather than historic allocations, and
to exclude the possibility of bail-out.)
As Bordignon (2000) and Bosi and Tabellini (1995) note, this led to a clear problem of
‘moral hazard’, with regions blissfully running spending overruns in key areas like health,
knowing that the central government would bail them out. The Italian case is an extreme
10 Note that this is a tax levied on business value added, and not a regional VAT scheme, which would not have
been approved by the European Commission. After IRAP was introduced in 1998, to replace the regional health
payroll tax, a two-year transition period was envisaged during which central government continued to set rates
(see Bordignon, 2000, Bibbee and Goglio, 2002).
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