Different administrative systems allow sub-central governments higher or lower autonomy in raising and spending resources. Correspondingly, fiscal results in those different levels of government may vary substantially. Nevertheless, in order to avoid generating the wrong set of incentives, sub-central governments are often subject to tight fiscal rules, especially about incurring debt to finance deficits.
In 2017, central governments in OECD countries had an average fiscal deficit of 1.9% of GDP while the fiscal deficit of sub-central governments amounted to 0.5% of GDP. The fiscal balance of central governments in 2017 ranged from -4.4% of GDP in Portugal to 5.4% in Norway, with only nine countries having a fiscal surplus. Among the federal states, the United States reported having the largest fiscal deficit (1.5%) at the state government level in 2017, followed by Canada (0.6%) and Australia (0.4%).
In terms of the fiscal balance of local governments in 2017, the largest surplus was in the Czech Republic (0.8%) and the largest deficit was in Iceland (1.3%). Local economies in the Czech Republic are steadily growing; to fully capture the benefits of this growth and make it inclusive a debt rule for local governments has been introduced and some equalisation mechanisms to adjust for differences in revenue-raising capacity have been put in place (OECD, 2018). In Iceland, local governments are responsible for infrastructure, planning and environment and rely largely on income taxes as their main revenue source. Tourism-related spending and pressing infrastructure upgrades are creating difficulties for the municipal governments, as local sources are not sufficient to meet rising pressures, generating a mismatch between revenues and spending (OECD, 2017). In 2018, there was a significant shift of fiscal balances between central government and social security funds in Lithuania, which is due to the debt cancellation of the state social insurance fund by central government.
Government debt could be incurred at the sub-central level in order to finance deficits at the sub-central level through borrowing. On average, debt held by the central governments of OECD countries amounted to 95.7% of GDP in 2017, while that held by the sub-central governments accounted for 20.3% of GDP. In federal states, state governments held significant levels of gross debt with the largest value recorded in Canada (47% of GDP), followed by Spain (27% of GDP). In the case of Canada, while overall debt levels are declining, a mixed trend is observed: between 2017 and 2018 in terms of GDP, debt decreased for the federal government (2.3 p.p.), while it increased at the state level (1.2 p.p.). Due to stricter rules on accumulating debt at the local levels, on average 7.2% of GDP in OECD countries were accounted for local governments, significantly lower than for central and state levels.
