Government is composed of various levels (central, state and local) with different abilities to collect revenues. The ability of sub-central levels to collect revenues depends on the degree of fiscal federalism. In countries where sub-central levels have limited abilities to collect taxes, their main source of revenues comes from central government transfers.
Recent OECD research has found that decentralising government spending and revenue collection tends to boost economic growth when both are decentralised to a similar extent and for economies that have a relatively higher level of integration to global markets. Even though decentralisation yields positive gains in terms of efficiency, the effects on equity vary from country to country (Kim and Dougherty, 2018).
There are differences across OECD countries in terms of revenue decentralisation. On average, the central government raises the largest proportion (52.9%). In Ireland (95.0%), the United Kingdom (91.6%), New Zealand (89.2%), Norway (83.8%) and Estonia (81.3%), the central government raises over 80% of revenues. In Germany, a federal country, this proportion drops to 28.0% and social security contributions stand as the largest share of revenues instead. In France, social security represents 47.2% of the revenues (the highest share among OECD countries) and the central level raises 36.9%. Although, on average, the local level raises the smallest share across OECD countries (10.5%), in the case of Korea (33.9%) and Sweden (33.3%) it represents about a third of the revenues.
It is expected that in federal countries, sub-central levels will have higher fiscal autonomy. Still, variation exists in how much is raised by each level. In Canada, the state level (i.e. provinces) raise more revenues than the central level (44.0% versus 35.6%). While the Canadian federal government collects all taxes, provinces can set their own taxes. In the United States and Australia, states raise around 40% of the revenues. On the other hand, in Austria states raise 3.9% and the local level 6.3% of revenues.
Expenditures vary largely across levels of government as well. The central government spends 41% of the general government expenditures on average in OECD countries. In line with raising revenues, in Ireland, New Zealand and the United Kingdom, the central government spends the largest share (91.5%, 88.3% and 76.7% respectively). Social security spends the most in Japan (49.7%), France (45.1%) and Germany (43.4%). In Denmark, although the central government collects the largest portion, the local level spends 64%. A similar pattern is observed in Sweden (local level spends 50.5%) and Finland (39.6%). In Canada and Switzerland, the canton/province level spends the most of overall government expenditures (47.1% and 37.0% respectively).
