Distribution of Competences in relation to Regional Development Policies in the Member States of the European Union

Transcription

1 Contract No CE.16.0.AT.040 / 2008.CE.16.CAT.014 Distribution of Competences in relation to Regional Development Policies in the Member States of the European Union FINAL REPORT SUBMITTED BY: FEBRUARY 2010

2 TABLE OF CONTENTS EXECUTIVE SUMMARY...4 GLOSSARY...14 INTRODUCTION...17 CHAPTER 1. LITERATURE REVIEW: FORMS THAT THE DISTRIBUTION OF COMPETENCES BETWEEN CENTRAL AND SUB-NATIONAL LEVELS MAY TAKE FORMS OF DECENTRALISATION FORMS OF INTERGOVERNMENTAL RELATIONSHIPS GOVERNMENT SYSTEMS GLOBAL FACTORS DRIVING DECENTRALISATION IN EUROPE SUB-NATIONAL TAX AND FISCAL FEDERALISM FINAL CONSIDERATIONS ON CHAPTER CHAPTER 2. MAIN FEATURES OF THE TRENDS IN DECENTRALISATION OBSERVED IN EUROPE OVER THE PAST FIFTEEN YEARS INTRODUCTION TRENDS OF DECENTRALISATION IN EUROPE MAIN FEATURES OF THE DECENTRALISATION PROCESS IN THE EUROPEAN COUNTRIES CONSULTATION MECHANISMS BETWEEN SUB-NATIONAL GOVERNMENTS General overview Examples of institutional arrangement for coordination THE EUROPEAN OUTLOOK: EXPENDITURE AND REVENUE OF DIFFERENT ADMINISTRATIVE LEVELS Expenditure Revenue FINAL CONSIDERATIONS ON CHAPTER CHAPTER 3. THE EVOLUTION OF COMPETENCES IN THE AREAS RELEVANT FOR REGIONAL DEVELOPMENT COMPETENCES ON DEVELOPMENT POLICIES IN DIFFERENT GROUPS OF EU MEMBER STATES Federalised States Regionalised states States with Northern systems Other Unitary States AN ANALYSIS OF EXPENDITURE IN THE SECTORS MOST RELEVANT FOR REGIONAL DEVELOPMENT The definition of public expenditure for development The scale of expenditure for development Expenditure for development: a focus on its composition FINAL CONSIDERATIONS ON CHAPTER CHAPTER 4. TERRITORIAL DISTRIBUTION OF COMPETENCES INTRODUCTION MAIN RESULTS FROM THE COUNTRY STUDIES ISMERI EUROPA APPLICA

3 Austria Germany Spain Italy France The UK Sweden Portugal Poland Hungary Czech Republic FINAL CONSIDERATIONS ON CHAPTER CHAPTER 5. CONCLUSIONS AND POLICY IMPLICATIONS REFERENCES ANNEX 1 COUNTRY NOTES (MS NOT COVERED IN THE CASE STUDIES) BELGIUM LUXEMBOURG DENMARK FINLAND THE NETHERLANDS SLOVENIA IRELAND GREECE SLOVAKIA MALTA LATVIA LITHUANIA ESTONIA BULGARIA ROMANIA CYPRUS CZECH REPUBLIC ANNEX 2 - METHODOLOGICAL APPROACH: FINAL CLASSIFICATIONS AND TEMPLATES INTRODUCTION MAIN IMPROVEMENTS TO THE METHODOLOGICAL APPROACH SPECIFIED IN THE INCEPTION PHASE DEFINITION OF MAIN CLASSIFICATIONS FINAL TEMPLATE FOR IN DEPTH COUNTRY ANALYSIS ANNEX 3 - NOTE ON ACCOUNTING CONSIDERATIONS WITH SPECIAL REFERENCE TO THE UK BUT OF GENERAL APPLICABILITY ISMERI EUROPA APPLICA

4 EXECUTIVE SUMMARY crisis of welfare state all contributed to this process. Introduction The present report is the final output of a study, launched by the DG REGIO in the fall of 2008, to obtain a thorough picture of the distribution of competences between the different administrative levels 1 in the Member States of the European Union. The study concentrates on competences in relation to regional development, in the areas supported by the EU Cohesion Policy, with a particular focus on the budgetary aspects. In order to pursue such objective, the study team has first carried out a literature review on forms that the distribution of competences may take and on definitions of categories of expenditure as well as functions of government. A methodological framework was set up to cross-analyse Member States. Eurostat data was then collected, processed and examined to identify main trends on expenditure and revenues in Europe during the last 15 years. Moreover, eleven country analyses were carried out in collaboration with national experts to collect detailed regional data from national sources and information on distribution of competences, its evolution and the role of EU Cohesion Policy in development across different regions. Forms that the distribution of competences between levels of government may take Europe has experienced a trend redistribution of competences from central towards sub central levels of government over the past decades. Globalisation, European enlargement, the revival of concern with local identity, subsidiarity, Cohesion Policy and the 1 Central government, regions, provinces, and municipalities. 4 ISMERI EUROPA APPLICA Decentralisation has three main components: political, fiscal and administrative. Administrative decentralisation may take, and has actually taken in the EU, different forms ranging from de-concentration (assignment of responsibility from one level of the central government to another), to delegation (redistribution of authority to a government agency or local unit) and devolution (authority and resources are assigned to a fully independent public authority). Moreover, different forms of intergovernmental relationships between levels of government exist both in theory and reality: dependence, separation, cooperation or competition for attracting resources. The combination of the different forms of decentralisation and of intergovernmental relationships are constitutive parts of different types of government systems. These can be confederal, federal and unitary. In the last case, the central government holds the entire sovereignty even though there are examples of unitary systems characterised by a strong tradition of local autonomy (e.g. the Nordic Countries). The literature also refers sometimes to regionalised systems in relation to European countries that have established an intermediate level of government. Empirical observations demonstrate that there is no strong correlation between the degree of institutional decentralisation and the level of fiscal autonomy of sub-national authorities. The relevance of the historical and political roots of the way in which institutions are organised and operate give rise to significant differences between institutional and fiscal systems. As regards the distribution of competences between different level of government, the theory of fiscal federalism sets out a general framework for the assignment of functions. In principle, the basic responsibility for stabilisation and redistribution policies, together with some non-local functions such

5 as defence, should bee allocated to the central government. Decentralised levels of government, on the other hand, should provide those public goods and services for which consumption patterns differ across regions, therefore tailoring the supply of these to local preferences. There is a considerable degree of uncertainty in some cases in relation to specific allocation of functions between administrations, type of taxes, levies and grants to be used. This is one of the reason for the variety of patterns of central and sub-national provision in respect to the same goods and services which is examined in the analysis of European MS carried out as part of the study. Main features of the trends observed in Europe over the past fifteen years To analyse the trends in redistribution of competences in the EU, the study distinguishes between four typologies of organisation of state: federal states, regionalised states, countries with Northern systems and other unitary states. Federal States (Germany, Austria and Belgium) are characterised by a central government and regional authorities both with own legislative and administrative competences. These are exercised independently and recognised by the Constitution. Countries such as Italy and Spain can be considered regionalised. They have established an intermediate level of government with a wide set of competences. At the moment despite a push towards increasing importance of regions also in traditionally unitary states such as the UK, Sweden and some of the EU12 countries, no other European case matches the degree of regionalisation that characterises Italy and Spain. States with northern systems (Sweden, Finland and Denmark), typically Scandinavian, are unitary countries where local governments have a wide range of responsibilities in relation to regional development. Unitary States, where the central government is predominant, can be found among both the EU15 (France, Portugal, the UK, Greece, Ireland, The Netherlands and Luxembourg) and the EU12 (Czech Republic, Hungary, Poland, Bulgaria, Cyprus, Estonia, Latvia, Lithuania, Malta, Romania, Slovakia and Slovenia). These countries are very heterogeneous in terms of history, size and so on and some of their specific features determine the degree of decentralisation which is relatively high in some cases (e.g. the Netherlands, Slovenia and Lithuania) and very limited in others (e.g. Ireland, Greece, Bulgaria, Romania and Malta). On average, the share of sub-national government in general government expenditure is nowadays highest in countries with a Northern system, in the federal and in the regionalised countries. Sub-national government expenditure as a % of General Government Expenditure % of general government expenditure Federal states "Regionalised" states "Northern systems" Other Unitary states Source: Eurostat Total Since the 1990s, the share of sub-national government spending in GDP has been fairly stable for Europe on average. A significant increase can however be observed in some cases (e.g. Belgium, Denmark and Spain) while the opposite occurred in others (e.g. Ireland, the Netherlands, and Austria). 5 ISMERI EUROPA APPLICA

6 Current expenditure absorb in most countries the major part of total sub-national expenditure and is particularly high in countries where sub-national governments manage education, healthcare and social protection (in the Nordic countries current expenditure absorb 94% of total sub-national government expenditure). On average, during the past 15 years the weight of current subnational expenditure in total expenditure has increased in almost all countries. Sub-national governments play an important role in relation to capital expenditure particularly in federal and regionalised states where more than 2/3 of capital expenditure are undertaken at the sub-national level. The disaggregation of capital formation by economic function shows that sub-national governments mainly carry out expenditure on economic affairs, housing and community amenities, education and recreation and culture. In most EU15 countries, economic affairs account for the largest share. Gross capital formation in economic affairs is higher at the sub-national level than at central level in most EU15 countries. There are relatively clear signs of increased decentralisation of Gross Capital Formation in Belgium, Spain, Sweden, the UK and Lithuania, insofar as this category of expenditure at the sub-national level has risen relative to GDP, while it has fallen relative to GDP at the central government level. The figures on revenue raised at the subnational level in EU countries correspond very closely to the respective figures for subnational government expenditure. This suggests that local and regional authorities are responsible for raising the funds to finance their expenditure. In around half the EU countries, both subnational government revenue and sub-national government expenditure have increased relative to GDP. In some of them, the increase in revenue has exceeded the increase of expenditure, so that there has been a potential expansion of financial means available at the sub-national level. This is the case in Slovakia 6 ISMERI EUROPA APPLICA and Poland as well as in Belgium, Sweden, Portugal, France and to a lesser extent, Spain and Italy. In the other countries sub-national government revenues relative to GDP have decreased, possibly giving rise to increased pressure on sub-national budgets. This is the case in Austria, Finland and the Netherlands as well as in Hungary, Lithuania and Bulgaria. Regarding the structure of sub-national government revenue it varies markedly between countries. In Sweden, Finland, Germany and Romania, the predominant part (more than 70%) are direct revenues, mainly tax revenues. The proportions of direct and indirect revenues are the opposite in the UK, Ireland, the Netherlands, Malta and Bulgaria. In these countries, revenue at the sub-national level come predominantly from transfers. The evolution of competences in the areas relevant for regional development The distribution of competences in relation to development is in line with the more general distribution of competences for public expenditure. As expected, more decentralised countries assign larger responsibility to regional and local authorities. However, there are also many less obvious features: - Federal and regionalised states do not show major differences in the distribution of competences. Clearly, competences, allocation of funds and related policy decision-making processes have not the same legal status in the two types of state but the basic division of labour between central and decentralised administrations, in development policy, is not so different; - Similar observations can be made for States with northern systems, where not only local administrations, but also intermediate levels of administration experience an increasing role in development policy; - In unitary States very different national models of competence distribution coexist but there are many cases characterised by local administrations with a significant

7 role in all, or many, policy areas relevant for development; - In many cases, cutting across all the typologies of states, competences are shared between different administrative levels, and hence in many policy areas relevant for development, co-decision or coordination between different administrative levels is necessary; - In general, the analysis shows that decentralised governments have more power in competences linked to territorial management (the environment, urban policy, culture, etc.) and in some important public services (housing, social services, public utilities, etc.). Instead, the central level has more power in infrastructure (energy, transport, etc.) and national standardised services (education, public safety) or in policy which is not territorialised (R&D). In relation to budgetary aspects, the expenditure for development has been analysed in the Member States of the EU. The expenditure for development (EfD) is an aggregate of public expenditure which embraces the eligible expenditure under EU Cohesion Policy and is directly comparable with it. On the basis of an estimation characterised by a certain degree of approximation, the EfD amounted to EUR 645 per capita in the period in the EU27, equivalent to 2.9% of GDP and 14.4% of gross fixed capital formation. main growth elements being central government and economic affairs. 1,200 1, EfD per head in different types of states by administrative level ( ; EUR) Source: Eurostat Federal Regionalised Northern systems Unitary (EU15) Unitary (EU12) Local gov. State gov. Central gov. EU27 Economic affairs is also the major element in EfD and involves around 50% of total expenditure (this function includes enterprise environment support, transport, telecommunications and other relevant policy fields). The remaining 50% is shared between environmental protection, housing and community amenities, health, recreation & culture, education. 100% 80% 60% 40% 20% EfD by function of government (General Government EfD=100; ) There were significant differences in EfD in recent years between EU countries, both in value and as a % of GDP. In general, countries included in the Objective Convergence had a high level of EfD, in large part thanks to EU Cohesion Policy, even if per capita expenditure is still lower than in richer areas. At EU level, decentralised governments undertake 65% of total EfD. Over the period , EfD is estimated to have increased in real terms by more than GDP, the 0% 7 ISMERI EUROPA APPLICA Federal Regionalised Northern systems Economic affairs Housing and community amenities Recreation, culture and religion Source: Eurostat Unitary (EU15) Unitary (EU12) Environment protection Health Education EU27 Economic affairs and health are the least decentralised policy areas, 52% and 38% of their total expenditure, respectively, being decentralised.

8 EU Cohesion Policy accounted for 11% of total EfD in the EU25 in the period ( for New Member States). In the countries of the Objective Convergence it is more important (up to 82% of total EfD in specific cases), but it also significant in other states: 7% of the total in Italy, 5% in Germany and 4% in UK. Only in 5 countries is contribution less than 3% of EfD (Austria, Belgium, Denmark, the Netherlands and Luxembourg). EU Cohesion Policy support as % of EfD (annual average and ) Luxembourg Netherlands Denmark Belgium Austria Sweden France UK Germany Finland Italy Ireland EU15 Cyprus EU25 Malta Czech Rep. Spain Slovenia Hungary EU10 Greece Poland Portugal Estonia Slovakia Lithuania Source: Eurostat and DG Regio data Latvia In countries where data allow a very detailed functional analysis, the EU contribution proved to be more important in the enterprise environment, R&D and environmental protection. Territorial distribution of competences An analysis of regional distribution of expenditure for development has been carried out in the countries covered in the case studies, based on data collected from national sources. The trends in public investment have been very different across Member States both at national and regional level. National choices, more than a common cycle, underlie these trends. As a consequence, EU Cohesion Policy co-existed with very different national contexts in terms of public investment growth. In recent years, development expenditure has tended to grow by less in Objective 1 regions than elsewhere in the countries examined. EfD has declined in Portugal, Germany and Italy and has been lower than in Objective 2 regions in Spain. Growth in the Objective 1 region in Austria were not particularly relevant. In Poland and Hungary, public expenditure expanded and this tend to favour less developed regions where public infrastructure endowment was deficient. The role of regional and local governments in managing development policies is significant (in general they account for over 50% of total expenditure), but can differ markedly not only across Member States (as stressed previously) but also within them and between regions. The share of local and state expenditure in total development spending ranges from 31% in London to more than 80% in Wales and to 96% in Bolzano (Italy). The large variation depends on institutional and policy arrangements which affect the distribution of competences between government levels and policy areas; the mix of these two factors can produce very different national and regional regimes. This is particularly true in countries with differing degrees of autonomy attributed to the regions (Italy, the UK), but it is also significant in other countries. 8 ISMERI EUROPA APPLICA

9 Capital regions (or large metropolitan regions) often have special arrangements as regards the distribution of responsibility for development policy; the cases of Vienna, London, Stockholm and Lisbon are evidence of this. For these regions, the mix between national and local expenditure is different from the mix prevalent in other regions. The regional distribution of the EfD is only to a limited extent in line with cohesion and equality objectives. In general, the level of this expenditure relative to GDP is higher in less developed regions, but in these regions per capita expenditure is often lower than the national average. This means that the people living in these regions often benefit less from public investment than those in more developed regions and this in the long run can widen disparities in terms of the endowment of public goods and services. In general expenditure for development is oriented towards correcting territorial imbalances. The detailed regional analysis carried out for 10 Member States confirms that expenditure for development relative to GDP is normally higher in the less developed regions. However, the analysis also highlighted the fact that per capita expenditure is normally lower in these regions and, hence, its propensity to improve cohesion, or to contribute to convergence, more limited. The results of the analysis suggest the following points. The propensity towards cohesion of public investment is the product of a combination of different forces, which act in a different way according to the distribution of competences and the national institutional and budgetary arrangements. It is difficult to identify general models as regards the pursuit of the objective of equalising resources, but in federal and regionalised countries, local governments seem to manage resources according to GDP and central or state governments provide some rebalancing in cohesion terms. In centralised countries, this commitment seems to be more related to the local government level. Austria Germany Spain Italy France UK Sweden Portugal Poland 9 ISMERI EUROPA APPLICA GDP and EfD per head in selected countries and regions Poorest and richest region GDP per capita ranking National average per head= 100 GDP Government Expenditure* Burgenland min Wien max Mecklenburg-W. min 68.0 Pomerania Hamburg max Extremadura min 65.7 Comunidad de Madrid max Calabria min PA Bolzano max Départements. min 58.9 d'outre-mer Île-de-France max Wales min London max Östra Mellansverigen min Stockholm max Norte min 79.7 Lisboa max Podkarpackie min Mazowieckie max Czech Republic Strední Morava min Prague max Northern Great Hungary Plain min Central Hungary max * General gov. in the case of Austria, Italy, UK, Sweden and Poland; State gov. in the case of Germany and Spain; Local gov. in the case of France, Portugal and Hungary. Source: National data collected by Ismeri Europa and Applica. The concentration of resources in the strongest regions is high in both cases, and the effort to equalise per capita investment in the different regions would require a large increase in investment expenditure. This point is crucial, because it underlines how difficult it is for the less developed areas to catch up in the context of the concentration of public investment in agglomerations to varying degrees, and, at the same time, how important it is to shift resources to the poorest regions to

10 avoid a widening of disparities in GDP. This aspect has to be contextualised in relation to the level of economic development (in particular, agglomeration push is understandable in former communist countries, in which market economies have been built up in the recent years), but in any case it requires policy measures to bring about territorial spillover effects and to exploit the potential resources of the less developed areas. Annual average change in real terms in EfD in selected countries by level of government Community Level of government Obj Central State Local General Austria obj obj Germany obj.1-6 n.a. n.a. 4.3 obj n.a. Spain obj.1 n.a n.a. obj.2 n.a n.a. Italy obj obj UK obj Sweden obj obj Portugal obj n.a. n.a. Poland obj Hungary obj.1 n.a. 1.8 n.a. UK is considered entirely obj.2 because obj.1 regions are not distinguishable. Source: National data collected by Ismeri Europa and Applica. In conclusion, very rarely are the differences in GDP per capita completely balanced by differences in development expenditure, but in general a positive effort towards convergence prevails. Concluding remarks and policy implications A redistribution of competences towards subcentral levels of government took place in Europe in the last two decades. Autonomy and revenues of local government have also increased. the need to respond through policy initiatives to the challenges posed by globalisation slowed down the devolution trend. The analysis of the distribution of competences in relation to development policies indicates the significant role of municipalities, both in unitary and decentralised States. On average, this level manages around 30% of public expenditure for development. How this expenditure can be included in broader development strategies, to support the whole region effectively without fragmentation of intervention, and the extent of involvement of local actors remain persistent questions for national and Cohesion Policy. Answering those questions is beyond the scope of this study. However, the results of the analysis underline the relevance of local development actions and the necessity of well defined governance at the municipal level in regional and national operational programmes. The possibility for Cohesion Policy to have in many countries a government level coinciding with the territorial level at which it is implemented (NUTS 2) does not seem to be feasible in the near future. At the moment, this is the case in only a relatively few countries (Italy, Spain and France and the small single-region states (Latvia, Lithuania, Estonia, Cyprus, Malta and Luxemburg), but in the remaining countries, it is not the case (in Germany, Austria, Belgium and in some degree the UK and the Netherlands, the relevant administrative level is NUTS 1) 2. The development of intermediate institutions, which in the beginning was an implicit objective of the Cohesion Policy, has not been achieved. In countries supported to a large extent by EU Cohesion Policy, the economic rationale behind this aim clashed However, financial devolution is particularly significant only in regionalised countries and 10 ISMERI EUROPA APPLICA 2 UK has an intermediate situation with Nuts 1 regional level Scotland, Wales, North Ireland plus Regional Development Agencies in England.

11 with resistance of the national context. In addition, other events (the enlargement, the single currency, as well as constitutional reforms) overcrowded the EU agenda. All this suggests that coordination between the central and local level remains fundamental for a successful EU Cohesion Policy. Sub-national governments as a whole are very important for public investment and for regional development. In total capital expenditure and in gross capital formation the share of sub-national government expenditure is larger than the share of central government and, in recent years, the EU27 average has reached 61% of total capital expenditure and 69% of gross capital formation. The role of sub-national governments is smaller as regards capital transfers. The role of sub-national level in public investment is largest in economic affairs, housing and community amenities, education and recreation, and culture because of increasing responsibility in these functions. Not surprisingly, the role of sub-national governments is most important in relation to territorial assets, while central governments maintain competence in relation to infrastructure, R&D and general aid-schemes. This division tends to vary according to the overall institutional arrangements 3, but in general it corresponds with functional criteria and subsidiarity. On average, sub-central governments account for two-thirds of total development spending, approximately EUR 425 per head. In regionalised States, sub-central expenditure per head was higher than for the central level (e.g. in Spain EUR 560 versus. EUR 260 per head). In some northern systems as well as unitary States, there is an imbalance in favour of the central level (e.g. Greece, Slovakia and Slovenia). In many other unitary States, there is a prevalence of local government 3 Sub-national governments support 75% of the total GFCF in Federal states and states with northern system, 60% in unitary states and 65% in the new member states (not consolidated data). 11 ISMERI EUROPA APPLICA expenditure (e.g. France and the Netherlands in the EU15, Poland in the EU12). Main competences of local governments for expenditure for development differ in relation to the country typology. In federalised countries, local authorities have competence in regulating issues of territorial importance such as traffic management and local public transport, building regulations and urban planning as well as some social services. In regionalised countries, central and intermediate levels of government tend to have shared competences in all areas relevant to economic development such as infrastructure, human resources, productive environment. In most sectors, the Central Government sets the basic legislation to guide the Regions. Countries with northern systems have an old tradition of decentralisation, especially with respect to the provision of services relevant to development. More recently, as mentioned above, efforts have been concentrated on increasing the efficiency of the spatial organisation of administrations, combining counties and municipalities into larger entities. Even though in recent years unitary states experienced to varying degrees, as stressed before, a process of increasing devolution of regional development policy, they remain very centralised. Competences in relation to infrastructure for development, human resources and business support schemes are either fully in the hands of central governments or the administration alone has been transferred to sub-national levels while decision-making remains a prerogative of the centre. The importance of EU Cohesion Policy for public investment is evident, as well as its capacity to balance territorial disequilibria and to favour a widespread distribution of growth potential. In this respect, Cohesion Policy has been fundamental to increasing the public investment capacity of Central and

12 Eastern European countries, which have been engaged in a major effort to update infrastructure, as well as of Italy and Portugal, where budgetary policy was restrictive. The significant role of local governments in public investment policy derives from the distribution of competences and from the wide powers over territorial policy of local governments. In general, among development policy initiatives, central government manages business support schemes, R&D, higher education, labour market measures and large infrastructure projects. Consequently, Cohesion Policy is an important support to sub-national government expenditure, especially in Objective 1 countries where funding was largest. If we examine recent trends, expenditure for development increased by 4% per year in Europe since However, national variations did not follow a common trend, but mainly reacted to national budget policy. The growth was substantial in some cases (Austria, Belgium, the UK) and in most of the EU12, rather limited in the large countries of the EU15, and negative in other states (e.g. Portugal, Greece). As a consequence, it can be argued that the macroeconomic influence of Cohesion Policy has been diverse across the EU: in some cases it counterbalanced restrictive policies while in other cases it supported expansionary policies. Therefore the effects of Cohesion Policy, especially in Objective 1 regions where its impact was greatest, have been strongly influenced by the public finance context and varied according to overall expenditure for development. The growth of expenditure for development in EU after 2000 pointed also to an increasing role of central government as compared to sub-national governments. This was evident in the more decentralised States and could be regarded as a consequence of the will to increase only the most flexible and easiest to modify component of the expenditure. Moreover the growth trend shows a general penalisation of the weakest areas: in dualistic countries (Spain, Italy and Germany), 12 ISMERI EUROPA APPLICA expenditure in Objective 1 regions decreased - or increased less than in other regions - and in Objective 1 countries (Portugal, Greece and the EU12) the increase in expenditure favoured the most advanced regions. Despite such penalisation of weak areas, the importance of the Structural Funds in avoiding an even more unbalanced distribution of public investment is evident (especially in Italy, Portugal and in many EU12 countries). The study also suggests some important directions for future research aimed at developing the analysis of expenditure for development further. The adopted definition of expenditure for development can support a clearer and more effective analysis of additionality in accordance with Structural Fund regulation. The possibility of linking the verification of additionality to data from national accounts (COFOG definition) was not an aim of the study, but it is its by-product. Additional work should be done to better fine-tune public expenditure and Structural Fund definitions and to develop a more practical and effective verification of additionality, as well as a territorialisation methodology for all the countries. The study confirms also the importance of having good data on public expenditure in order to understand the role of EU Cohesion Policy. Data and indicators of public expenditure should be connected to the monitoring systems of the EU NSRFs and of the Operational Programmes in order to assess the real contribution of the Structural Funds to the different policies. The world economic crisis, whose impacts are still uncertain in terms of size and duration, constrains public and private investment. Statistics can only capture these developments with a certain degree of delay and hence the effect of the crisis on investment will be shown in the years to come. Public intervention undertaken to mitigate the consequences of the crisis also led to a

13 loosening of the effort to keep public debt under control. In the future, the needs to reduce public debt and comply with the parameters of the Stability Pact are likely to be a priority in the public agenda. In such context, keeping a high level of attention on investments for regional development, as in the present study, is of uttermost importance. 13 ISMERI EUROPA APPLICA

14 GLOSSARY Capital Expenditure measures the value of purchases of fixed assets, i.e. those assets that are used repeatedly in production processes for more than a year. Common examples of a capital expenditure include the purchase of a new building, or the cost of significant upgrades to an existing facility. A capital expenditure is amortized over the length of the life of the investment. A capital expenditure is also sometimes referred to as capital spending or a capital expense. Capital expenditure includes gross capital formation and capital transfers. Capital transfers consist of the transfer of ownership of an asset (other than inventories and cash), or the cancellation of a liability by a creditor, without any counterpart being received in return. A capital transfer in cash consists of the transfer of cash that the first party has raised by disposing of an asset, or assets (other than inventories), or that the second party is expected, or required, to use for the acquisition of an asset, or assets (other than inventories). The second party, the recipient, is often obliged to use the cash to acquire an asset, or assets, as a condition on which the transfer is made. Capital transfers cover capital taxes, investment grants and other capital transfers (see ESA 95). Classification of Functions of Government (COFOG): the Classification of the Functions of Government is an international classification of public expenditure according to purpose, used to identify the socio-economic objectives of current transactions, capital outlays and acquisition of financial assets by general government and its sub-sectors. The COFOG was developed by the Organization for Economic Co-operation and Development and published by the United Nations Statistical Division. It can be applied to government expense and the net acquisition of nonfinancial assets. COFOG has three levels of detail: Divisions (1-digit level), Groups (2-digit level), and Classes (3-digit level). The Divisions could be seen as the broad objectives of government, while the Groups and Classes detail the means by which these broad objectives are achieved. Only divisions and groups have been used in the analysis carried out in this paper 4. Current expenditure is expenditure on goods and services consumed within the current year, which needs to be made recurrently to sustain the production. Minor expenditure on items of equipment, below a certain cost threshold, is also reported as current spending. European System of Accounts 1995 (ESA95): the system of national and regional accounts used by the Members States of the European Union, updated in ESA 95 is the result of several years work and draws on the experience acquired by the European statistical system during its work on harmonising gross national product (GNP) and is fully consistent with the revised worldwide guidelines on national accounting, the System of National Accounts (1993 SNA, or simply SNA) 5. Expenditure for development (EfD) is a measure of public capital spending on functions relevant to development plus current expenditure for training. This concept has been developed by the study 4 For further information on COFOG, see Classifications of Expenditure According to Purpose (United Nations, Department of Economic and Social Affairs, Statistics Division, Statistical Papers, Series M, No. 84, New York, 2000) and Manual on sources and methods for the compilation of COFOG Statistics (Eurostat, 2007 Edition). 5 See COUNCIL REGULATION (EC) No 2223/96 of 25 June 1996 and on the European system of national and regional accounts in the Community and following upgrading versions. 14 ISMERI EUROPA APPLICA

15 team of the present project in order to obtain an aggregate of public expenditure which is as much consistent as possible with the spending eligible under the EU Cohesion Policy. The EfD definition includes thematic areas as defined by COFOG divisions: public gross fixed capital formation in economic affairs, environmental protection, housing and community amenities, health, recreation, culture and religion, and education; capital transfer to the private sectors in economic affairs, environmental protection, housing and community amenities as well as recreation, culture and religion; plus public current expenditure on training (for more information see chapter 3 and Annex 2). General government (GG) - ESA95 defines the general government sector as all resident institutional units that are other non-market producers whose output is intended for individual and collective consumption, and are mainly financed by compulsory payments made by units belonging to other sectors, and/or all institutional units principally engaged in the redistribution of national income and wealth. A resident unit is regarded as constituting an institutional unit if it has decisionmaking autonomy in respect of its principal function, and either keeps a complete set of accounts or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts if they were required. The definition of the general government sector excludes institutional units that are market producers. These are units that derive their income from sales of goods and services rather than transfers. Such units are classified to the corporations sectors. These sectors include government owned and controlled market units, known as public corporations, such as government-owned postal and transport services. However, the general government sector can include institutional units that have market sales as a secondary activity (for example a government statistical office might sell books of statistics) or receive partial payments for services provided (for example there might be nominal charges for certain health services supplied by government units). The general government sector comprises four sub-sectors: a) Central government (CG) This includes government departments, agencies, parliamentary bodies, military forces, and non-budgetary institutions serving households that are controlled by central government. The State is sometimes used to describe a subset of central government units that are under the direct day-to-day control of government ministers. b) State government (SG) This applies to countries such as Spain, Germany, Austria and Belgium that have a federal level of Government. It does not apply in the majority of EU member states. c) Local government (LG) This is the level of government applying at the level of cities and towns and other geographically limited entities below the level of regions. d) Social security funds (SS) This includes autonomous pension funds if they are obligatory by law or by regulation and if general government is responsible for the management of the institution in respect of the settlement or approval of the contributions and benefits. It also includes schemes established by government to fund health care and social benefits where there are separate institutional units administering the contributions and benefits. Gross Capital Formation (GCF) consists of gross fixed capital formation (see below), changes in inventories (i.e. all commodities held in stock with the intention of using them as intermediate inputs in production and output produced that is not yet finished such as uncompleted structures), acquisitions less disposals of valuables (i.e. non-financial goods that are not used primarily for production or consumption, do not deteriorate physically over time under normal conditions and that are acquired and held primarily as stores of value; for instance, precious metals). Gross (Capital Formation) means that consumption of fixed capital is not deducted. Gross Fixed Capital Formation (CFGF): consists of acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of non-produced assets realised by the 15 ISMERI EUROPA APPLICA

16 productive activity of producer or institutional units. Fixed assets are tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly, or continuously, in processes of production for more than one year. GFCF mainly include: acquisitions, less disposals, of tangible fixed assets such as other buildings and structures, machinery and equipment etc.; acquisitions, less disposals, of intangible fixed assets such as computer software; entertainment, literary or artistic works etc. 16 ISMERI EUROPA APPLICA

17 INTRODUCTION The present study aims at analysing the distribution of competences in relation to development policies between the different administrative levels in the Member States of the European Union and at assessing the contribution of EU Cohesion Policy at national and regional level. The study provides an analysis of the powers of the different levels of government and of the trends in the decentralisation processes that have taken place during the last fifteen years. The analysis is both quantitative and qualitative. The latter concerns mainly institutional organisation of a state; the former is focused on the distribution of resources and the actual expenditure of each government level in the main policy fields related to development policy. Eurostat provides information on these topics at national level and for the main expenditure functions. However, the availability of detailed data on the expenditure of the different government levels is limited and heterogeneous among countries, especially in relation to the regional level. This required the study team to use several national sources and carry out estimates in a number of MS which were analyses in detail (Austria, Germany, Spain, Italy, France, the UK, Sweden, Portugal, Hungary and Czech Republic). These cases represent some interesting examples of the main typologies of organisation of state in Europe: Federal states; Regionalised states; states with a Northern System and other Unitary states. Comparisons between the expenditure for development of the different government levels and EU Cohesion Policy support are provided at national and regional level. The report is the outcome of the last phase of the study. In this phase the study team has revised part I and II which were submitted with the Interim Report and developed part III of the study. Part I of the study (see Chapter 1) provides a literature review of the forms that the distribution of responsibility and competences between the central level and the sub-national levels may take from a theoretical point of view. This part includes a definition of the different denominations that have been given to processes of transfer of powers to the sub-national levels (decentralisation, devolution, regionalisation) underlining the main differences between them. Moreover, the review summarizes the main factors driving decentralisation in Europe as well as the main traits of the theory of fiscal federalism. According to the literature, Europe has experienced a trend redistribution of competences from central towards sub central levels of government over the past decades. Globalisation, European enlargement, the revival of concern with local identity, subsidiarity, Cohesion Policy and the crisis of welfare state all contributed to this process. The intensity of trend varies greatly from country to country in relation to their history, their institutional settings as regards forms of decentralisation and intergovernmental relationships etc. In some Member States the increasing competences of subnational governments translates into de-concentration, in others it means devolution, and in yet others, it has meant various intermediate situations. Part II of the study (see Chapter 2) describes the main features of the trends observed in the different Member States during the last fifteen years. The study presents the evolution of the distribution of powers between the different administrative levels; a description of the institutional arrangements, if any, set up to ensure permanent dialogue and co-ordination between the different administrative levels; and the budgetary arrangements established to fulfil those functions. 17 ISMERI EUROPA APPLICA

18 To carry out this part the study team has collected and re-organized the Eurostat public sector accounts data available in order to determine the division of responsibility for relevant expenditure and for raising revenue in each Member State and how this has changed since Government Finance Statistics compiled by Eurostat on expenditure and revenue supplement the literature review and enable the main features of the trends observed during the last fifteen years at different administrative levels in Member States to be explored in quantitative terms. In particular they can be used to shed light on the role of different levels of government as regards expenditure of various kinds on different economic functions. Disaggregation of capital formation by economic function, for example, indicates that sub-national levels of government mainly carry out expenditure on economic affairs, housing and community amenities, education and recreation and culture, as defined by COFOG. It is clear that sub-national governments play an important role in relation to capital expenditure, particularly in federal and regionalised states. However, the data show that the share of resources raised and spent by these in relation to both general government expenditure and GDP has tended to remain relative stable in most countries over recent years. Only in a few cases was there a significant increase in their share. This is also evident in relation to revenue. Accordingly, it seems that the shift in institutional arrangements towards more decentralisation has not always been accompanied by a corresponding change in the budget. Part III of the study (see Chapter 3 national level and Chapter 4 regional breakdown) provides an analysis of the evolution in the last fifteen years of competencies, and in particular of budgetary competences, in the areas relevant for regional development. For this part, in order to achieve a higher level of detail than that possible from more readily accessible statistics provided by Eurostat, the study team has collected detailed information in selected countries with the help of national experts. Consideration of the appropriate definitions and classifications to be adopted has emphasised the complexity of the methodological framework of the study and the need for close coordination. The analysis focuses on three main aspects and on the methodological issues which arise in each of these: administrative levels, budgetary indicators for development and territorial breakdown. The appropriate definitions to adopt in each of these areas can vary from country to country. A pragmatic approach has been adopted to designing a template for the collection of data and to determining the specific data to be collected, recognising the differing systems of government which exists across the countries and the differing availability of data. The overriding aim has been to compile the most detailed data which are available in each country, to try to achieve as much comparability across countries as possible while accepting that full comparability given the present state of affairs is likely to be impossible and that placing too much emphasis on it might mean not collecting the most relevant data which exist. The most problematic task has been to break down spending by region. Inevitably, a varying amount of estimation has been required to produce a reasonable indication of the actual situation. According to the analysis, the expenditure for development in Europe is concentrated on economic affairs that account for approximately half of the total. Within this, transport, manufacturing and construction are by far the most important areas of spending. The role of the different administrative levels in development, as reflected in the expenditure figures for the period reflect by and large the analysis carried out in the previous parts. For instance, the importance of the regional level is evident in regionalised states; there is a balance between central and local government expenditure in EU15 unitary states, with less spending at intermediate level (e.g. regions, counties) and more spending by municipalities; In the EU 12 unitary states covered, the sub-national administrations are responsible for a smaller share of general government expenditure even though 18 ISMERI EUROPA APPLICA