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Box 7. Mechanisms to introduce competitive pressures on providers of publicly funded services

Box 7. Mechanisms to introduce competitive pressures on providers of publicly funded services

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OECD Economic Surveys: Ireland



64



Box 7.



Mechanisms to introduce competitive pressures on providers

of publicly funded services (cont.)



users to choose among different suppliers of publicly funded services. The examples of these implicit voucher systems include: school choice programmes

whereby funding for a school is based on the number of users, fee-for-services for

health care suppliers reimbursed by the social security system, per-user subsidies for private nursing homes, income-dependent benefits earmarked for the

purchase of child care in approved centres and tax credits for documented private

schools fees. However, the degree to which user choice creates competitive pressures on suppliers depends much on whether public funding per user is levelled

across public and private suppliers, which may often not be the case.



Improving the effectiveness of spending by sub-national government

The Irish public administration is one of the most centralised among

OECD countries, with local government subject to more strict statutory, administrative and financial control than its counterparts elsewhere. There are 34 county/

city local authorities that are the main providers of local government services. In

addition, 80 town authorities carry out a representative role for the town with a

varying range of local government functions.41 These authorities in Ireland have

one of the largest population sizes per basic unit among EU countries, but carryout a narrower range of functions than elsewhere.42 Local authorities are mainly

responsible for the provision of infrastructure and services including roads, social

housing, water supply and sewerage, planning and environmental protection.43

They are not primarily responsible for such functions as education, health, police

and social welfare, which are the responsibility either of central government

departments or of separate local or regional bodies.44 Local authorities are subject

to tight financial control by the central government through the balanced budget

rule for current expenditure and the requirement that local borrowing be subject

to the approval by the central government.

Local authority funding system could be improved to promote allocative

and cost efficiency

The abolition of the local property tax on domestic dwellings in 1977 and

on agricultural land in 1983 led to a highly centralised system of financing of local

authorities in Ireland (see Box 8). The share of tax revenue in local government

finance in Ireland is one of the lowest among OECD countries, while the share of central government grants is among the highest (Figure 11). Although local authorities



© OECD 2003



Enhancing the effectiveness of public expenditure management



Box 8.



Local authority funding



In the 1970s, property taxes were charged on commercial, domestic and agricultural property and these, combined with fees and charges, provided 50 per cent of

local authority needs from local sources. Legislation enacted in 1978 abolished the

local property tax on domestic dwellings and replaced it by a central government grant

– the Rate Support Grant. With effect from 1983, the property tax on agricultural land

was terminated as a result of a court judgement. Since then, the levying of local property

tax has been confined to commercial and industrial property.

Prior to 1988, local authorities borrowed (mainly from state agencies) for various

capital purposes such as housing, water and sewerage, libraries, etc., with state subsidy to assist them in paying the resulting loan charges. In 1988 this system was replaced

by direct capital grants from the central government for the relevant projects. There

are four main sources of local authorities’ current income:

Tax revenues. Proceeds from commercial rates, which are levied annually by local

councils on the value of commercial premises, are the only source of local tax revenues. In general, local authorities are free to decide on the overall level of rates collected by them annually. Between 1999 and 2002, caps had been set by the central

government on the overall maximum level of rate increases that can be applied by a

local authority. But starting from 2003, no such cap is set by the central government.

Non-tax revenues. Non-tax revenue receipts of local authorities come from the

provision of a wide variety of goods and services of which the most significant are rents

and part of the proceeds of sales of local authority housing, repayments by borrowers

of house purchases and improvement loans and charges for water supplies, refuse collection and sewerage facilities. Non-tax revenues comprise about 30 per cent of local

authority revenues. Local authorities are generally free to determine the charges payable for miscellaneous receipts, except for domestic water charges which were abolished nationally in 1997. The responsibility for paying domestic water and sewerage

charges was transferred from domestic water users to the central government with

effect from 1 January 1997.

Earmarked grants. Earmarked grants cover all of local authorities’ capital expenditure and a substantial portion of current expenditure. Most earmarked grants cover

100 per cent of actual expenses, although for smaller grant schemes, local authorities

may be asked to co-finance – typically 25 per cent – according to the matching rate set

by the central government. The bulk of earmarked grants go to local capital projects,

e.g. roads and public housing.

Block grants. A system of block grants was modified in 1997, with the introduction

of the local Government (Equalisation) Fund which was subsequently amended

in 1999 and became the Local Government Fund. The Local Government Fund provides finance to local authorities as general-purpose grants and for non-national roads

and is itself financed from two sources: an Exchequer contribution and the full proceeds of motor taxation. The general-purpose allocations from the Local Government

Fund are determined in part by a “needs and resources” model. The model decides

allocations based on each local authority’s needs (set against expenditure targets at

service level) and resources (set against the capacity to raise resources through other

means). This is effected by analysing each authority’s current expenditure and income

patterns (including income from commercial rates) for each service and adjusting each

authority’s actual expenditure and income towards the standard for that service. The

difference between expenditure and income for each authority identified by this process indicates the funding that should be provided through general-purpose allocations. This model is gradually being refined to customise it to expenditure and income

conditions in each local authority.



© OECD 2003



65



OECD Economic Surveys: Ireland



66



Figure 11. Composition of subnational government financial resources

As a percentage of total financial resources, 19991

Non-tax revenue 2



Tax revenue



Grants



Federal countries

% of state government resources



% of local government resources



100



100



100



100



90



90



90



90



80



80



80



80



70



70



70



70



60



60



60



60



50



50



50



50



40



40



40



40



30



30



30



30



20



20



20



20



10



10



10



10



0



0



0



AUS AUT CAN DEU MEX SWI USA AVG



AUS AUT CAN DEU MEX SWI USA AVG



0



Unitary countries

% of state and local government resources



100



100



90



90



80



80



70



70



60



60



50



50



40



40



30



30



20



20



10



10



0



CZE DNK FIN FRA HUN ISL



IRE ITA LUX NLD NZL NOR POL PRT SVK ESP SWE GBR AVG



0



1. For non-tax revenue: 1984 for Switzerland, 1997 for France, Ireland, Luxembourg, Netherlands and Spain, 1998 for

Iceland, Norway, Portugal and United Kingdom.

2. Non-tax revenues include: operating surpluses of public entreprises controlled by sub-national governments;

property income; fee, sales and fines; contributions to government employee pension funds and capital revenues.

Source: OECD Revenue Statistics, 1965-2001.



© OECD 2003



Enhancing the effectiveness of public expenditure management



67



have been increasingly financed by local non-tax revenues, the current financing

system allows very limited discretion to local authorities to determine local service and related expenditure levels.

The absence of a local property tax on households could potentially have

negative implications for local government accountability as local households do

not directly pay for a significant portion of the services provided by local authorities. Together with the absence of domestic water and sewerage charges, this

could also put excessive upward pressure on the demand for local services.45 The

large reliance of local authorities on central government grants may also have negative implications for allocative and cost efficiency. A large proportion of these

central government grants is funded as earmarked grants, i.e. tied to specific

expenditure programmes. Earmarked grants are particularly important for counties which collect a relatively low amount of commercial rates due to the abolition

of rates on agricultural lands in the 1980s (Figure 12). While the use of earmarked

grants may serve to internalise externalities associated with infrastructure provision, heavy reliance on them may contribute to inefficient local spending. In particular, the fact that most of the grants cover 100 per cent of ex post actual expenses

may weaken incentives to contain costs. The prevalence of earmarked grants also

permits little flexibility needed to enhance allocative efficiency as funds cannot

be shifted to other uses in accordance with changing priorities.

The newly established funding system, called the Local Government

Fund, represents a significant move to introduce equalisation between local

authorities through formula-based block grants. It has also injected a measure of

stability and certainty into local government financing.46 The allocation formula

will continue to need refinement so that the formula sets the standards, where

possible, for different services while allowing authorities to make decisions based

on local preference.

Local government reforms have been underway

A number of measures have been introduced to strengthen the accountability framework for the performance of local authorities in recent years, which

have significantly enhanced the quality of performance management systems at

the local level.47 First, regular value-for-money audits, conducted by the Value for

Money (VFM) Unit in the Department of the Environment and Local Government,

have been a feature of local government management in recent years.48 Second, significant investment has been made in the development of new financial management and costing systems. Accounting procedures are being switched from a cash

to an accrual basis. A new costing system that generates information on the true

cost of providing individual services will commence development in 2003 and will

be rolled out to local authorities as soon as possible thereafter. Third, a greater

emphasis is being placed on performance management at local government level.



© OECD 2003



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