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



authorities can only borrow for investment purposes, in proportion to their financial capacity,
and subject to agreement by the Land’s interior ministry. Spain imposes similar limits to total
debt service spending and only allows short-term borrowing to cover cash-flow requirements
and long-term borrowing to finance public investment projects. It is interesting to note that
there is sometimes little relation between the degree of decentralisation in spending and
borrowing autonomy. For instance, in France regional and local authorities have considerable
latitude in deciding how much to borrow for capital expenditure, although borrowing is not
allowed to cover current expenditure or to refinance existing loans.

Another important point to note is that the Maastricht criteria, and subsequently the Stability
and Growth Pact, have forced some countries to bring in greater controls over borrowing by
sub-central governments. For instance, Austria introduced an ‘internal’ Stability Pact in
January 1999 to help ensure that the overall deficit position for all levels of government does
not exceed 3%. This is done by allowing very little margin for borrowing by sub-central tiers
of government, who are only permitted to run an aggregate deficit of 0.3% of GDP. Italy has
imposed a similar ‘internal pact’. One problem with such
ad hoc solutions is that they might
place too my much of a constraint on public investment, as borrowing is typically only
undertaken for capital projects. This is a well-known criticism of the EU Stability and
Growth Pact in contrast to the ‘golden rule’ for borrowing adopted in the UK.

If the UK were to introduce greater fiscal autonomy for its devolved authorities, and if this
were followed by entry into EMU, greater constraints might be imposed on the spending of
sub-central government. Presently, the Scottish Parliament faces the same constraints as a
central government department ie it is possible to carry over underspending, and limited

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