Fiscal federalism and Fiscal Autonomy: Lessons for the UK from other Industrialised Countries

OECD countries have relied on the use of historic shares or needs-based assessment to set
grants for sub-central governments. From our discussion so far, it should be apparent that
even those countries where sub-central governments have considerable fiscal autonomy (e.g.
Sweden, Finland,and Denmark) have retained some system of central grants in order to
provide some system of horizontal equalisation. Whatever any future devolution reform holds
for the UK, there is likely to be a continued reliance on central government grants, and a
comparison with other countries is instructive. Given the limited space available, we will
focus on a limited number of examples grant systemsin operation in other countries.

With very few exceptions, other European countries have moved away from formulae based
on historic shares, such as the Barnett formulae, towards formulae that use objective
parameters that measure fiscal need and tax-raising capacity. Perhaps the only exception to
this rule is Italy, where for political reasons it has been very difficult to move towards a
formula based on objective indicators of needs and costs in different municipalities. As noted
above, the 2000 reform of regional financing, involving a switch to a needs-based horizontal
equalisation system (based on demographic factors and potential per capita revenues from
regional taxation), is to be phased in over a long period of time.

The majority of other countries have made central government grants the centrepiece of some
form of horizontal equalisation. We have already touched on the equity versus accountability
trade-off raised by such equalisation schemes.

Equalisation schemes take a variety of forms but often involve an element of central grant. In
some cases, such equalisation schemes are self-financing. For instance, in Sweden, since
1996 a self-financing equalisation system has covered all the municipalities and counties.
This system aims to offset 95% of the differences in taxable income per capita between local
governments and allows for major differences in delivery costs. In Denmark, general grants

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