How to design decentralisation to curb secessionist pressures? Top-down vs. bottom-up reforms

F. Cerniglia , R. Longaretti, A. Zanardi  2021 - Structural Change and Economic Dynamics

 

How can we explain the claims for asymmetric decentralisation recently put forward by some Italian regions?

In a recently published paper, How to design decentralisation to curb secessionist pressures? Top-down vs. bottom-up reforms in Structural Change and Economic Dynamics, Floriana Cerniglia, Riccarda Longaretti and Alberto Zanardi investigate by means of an analytical approach the reasons why a region is spurred to secede from a unitary or federal nation and how those pressures can be curbed by an institutional reform which grants those regions greater autonomy. In particular, they demonstrate that a reform consistent with a pattern of differentiated and flexible decentralisation, where single regions can opt to assume or not stronger fiscal responsibilities on the basis of bilateral negotiations with the central government, may be more successful in avoiding instability and secessionist conflict than a more standard top-down decentralisation, where the central government assigns identical fiscal powers to all regions.

The general scheme developed in this work allows to frame and explain institutional solutions and arrangements that in recent decades have frequently been implemented in different countries. The most accomplished example of this bottom-up decentralisation is probably the case of Spain. After the downfall of Francoism, the 1978 Constitution provided for the possibility for some special regions, the so-called Historical Communities, to agree with the central government to be assigned ‘on request’ specific additional powers. Afterwards, during the 80’s and early 90’s, other regions followed the same path, by negotiating a similar level of autonomy, and this process ended up in a greater uniformity across regions. However, this evolution has more recently prompted Historical Communities to raise the stakes, by making further claims for greater autonomy in a process that culminated in Catalonia’s unilateral declaration of independence in October 2017. But even at the supranational level, Brexit is a process that has a striking resemblance to secession to the extent that it marks the withdrawal of the UK from the EU community of law.

This interpretative scheme is also able to shed light on the recent experience of regional decentralisation in Italy. The 2001 constitutional reform allows ordinary regions to assume, if they deem it convenient, additional legislative and administrative powers in a large array of areas currently assigned to the central government. This contractual procedure, potentially recognized to all ordinary regions, has been actually triggered up to now by the three regions with the highest per-capita GDP in the country (with a clear departure from the experience of special statute regions which at the time of their establishment were peripheral areas, characterized by weak economies and linguistic-cultural specificities).For the three requesting regions, this new interpretative model provides for a strong push towards secession which, however, can be effectively curbed, with a net gain for the entire national community, if they are recognized for some forms of greater autonomy while maintaining their full involvement in interregional equalization provided for by the Constitution.

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The sacred and the profane of budget cycles: evidence from Italian municipalities

F. Revelli, R Zotti, 2019 - International Tax and Public Finance

 

 

The idea that incumbent governments time their fiscal policies in order to signal their competence and boost their re-election chances is not new in the political economy literature of the past decades. What has increasingly emerged in recent research is the interest on the relationship between the political budget cycle and local circumstances and characteristics, such as social capital.  Indeed, social capital is recognized to play a central role in improving the quality of public policies through active participation and monitoring, strengthening the accountability of elected officials, and possibly weakening the incentives of budget manipulation.

Is it possible to detect a consistent link between local elections and social-capital-boosting recurrent events?

In a recently published paper, The sacred and the profane of budget cycles: evidence from Italian municipalities, in International Tax and Public Finance, Federico Revelli and Roberto Zotti empirically investigate the consequences of annual traditional religious celebrations, Patron Saints Days, on the political budget cycle and the scheduling of key municipal fiscal decisions by incumbent governments at the municipal level in Italy.

The analysis is made possible thanks to a rich panel dataset of over 8000 Italian municipalities during the period 2007–2015 containing detailed information on the timing (day of the year) of  all municipal elections (from the Italian Ministry of Interior), of the fundamental fiscal policy decisions by incumbent mayors and budget indicators of municipalities (ISTAT and Department of Finance of the Italian Ministry of Economy and Finance), and of each municipality’s Patron Saints Day (from the Italian Municipality database).

In order to catch fiscal policy decisions by incumbent mayors, the authors focus on two main fiscal instruments, the local property tax and, more importantly, the surcharge on the national personal income tax. Thanks to a decentralization process that has interested the Italian fiscal system in the last twenty years, each municipality is able to act on these two sources of revenue, either raising or cutting them.

The analysis develops as follows.

First of all, the authors focus on three municipal budget variables that might be strategically maneuvered by incumbents, namely: the degree of financial autonomy (defined as the ratio of revenues from taxes, fees, and charges over total revenues), the degree of taxation autonomy (defined as the ratio of tax revenues over total revenues), and the budget surplus (as a percentage of total revenues). The analysis confirms that a political budget cycle exists, characterized by pre-electoral fiscal expansion and post-electoral austerity. In other words, the chosen indicators of fiscal effort fall before the elections and increase after them, while municipal budgets deteriorate before the elections to improve thereafter.

This effect is clearly detectable looking at the following figures. The indices of revenue-raising effort of municipal governments such as financial autonomy (Figure 1) and taxation autonomy (Figure 2) fall before the elections and rise after the elections, peaking around the second year after the elections and declining thereafter. The budget surplus (Figure 3) improves after the elections and in the subsequent three periods and deteriorates when the next election approaches.

Figure 1 Degree of financial autonomy

Figure 2 Degree of taxation autonomy

Figure 3 Budget surplus

Then, the analysis focuses on the role of social capital in shaping the timing of fiscal policy-making. In particular, the authors test whether the decisions about the local income tax rate are more or less likely to be slated in the proximity of events — like traditional celebrations of Patron Saints — that can be believed to foster the degree of social participation, cohesion, and connectedness of the polity. To do so, thanks to the staggered scheduling nature of the data on municipal elections, the precise dates when municipal councils make their annual income surcharge rate-setting decisions are connected to the timing of both local elections and traditional celebrations. Two pieces of evidence emerge. On the one hand, a generally acknowledged result is confirmed: the probability to raise the local income tax rate is significantly higher during post-electoral than during pre-electoral months.

On the other hand, in terms of the impact of the timing of traditional celebrations on local fiscal policy-making, two potentially competing mechanisms might intervene. The first implies the idea that any tax hike decided by the incumbent government during period of celebrations will tend to have an amplified echo within the community and could possibly generate a stronger than usual opposition. As a result, incumbents would program potentially disruptive local tax decisions to a different time of the year. In contrast, a second observation arises: in the preparation of the celebrations it is also true that citizens may have less time to monitor what local governments are actually doing because they are too distracted and there might be a “panem et circenses” effect, i.e. incumbents might possibly try to take advantage of the electorate’s distraction to enact the potentially most unpopular fiscal determinations. According to the data, the former effect seems to prevail: local income tax-setting decisions are more likely to be scheduled far from celebration periods. This novel evidence is compatible with the idea that those events provide temporary but sizeable shocks to the connectedness, participation, and trust within a community, inducing incumbents to schedule potentially disruptive fiscal decisions to less sensitive times.

The last part of the analysis turns to the investigation of whether the interaction of the calendars of mayoral elections and of Patron Saint Day celebrations has an influence on the selection of mayors. Indeed, when elections happen to occur concomitantly with traditional religious celebrations, and particularly during the weeks preceding the Patron Saint Day, the elected mayors of those localities tend to be characterized by milder ideological affiliation and higher indicators of valence. This result corroborates the hypothesis that local folklore contributes to increasing the sense of cohesion and common value thinking of a community of the concurrence of sacred (Patron Saint Day) and profane (election day) events and lowering the ideological stakes of local races.

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Political competition, tax salience and accountability. Theory and evidence from Italy.

 

 

E. Bracco, F. Porcelli, M. Redoano 2019 - European Journal of Political Economy.

 

Does political competition improve or hinder political accountability?

 

A growing literature both in economics and political science recognizes that political competition improves governments’ efficiency and economic outcomes. Elections are an effective instrument to promote political accountability, and to communicate voters’ preferences to politicians seeking or holding public offices. This positive effect of elections on accountability is thought to be more effective if electoral competition is stronger. Accordingly, when candidates face strong political competition, voters are better able to hold them accountable; this, in turn, reduces rent diversion and induces candidates to exert more effort.

Is this the only right way to interpret this relationship?

The answer is no. Indeed, Emanuele Bracco, Francesco Porcelli, and Michela Redoano propose an alternative story: in a recently published piece of research, Political competition, tax salience and accountability. Theory and evidence from Italy, in the European Journal of Political Economy, they argue that stronger electoral competition does not necessarily imply better political accountability because when electoral competition is stronger, politicians might also have stronger incentives to weaken accountability channels.

Concentrating on a specific aspect of public policy, governments’ ability to finance public expenditures via multiple tax instruments, their study examines the different degree of salience of the available revenue sources for municipalities. Indeed, politicians are able to shape local public finance not only through the setting of the level of taxation but also the tax mix across the available instruments. Their new interpretation of the mechanism at stake is that stronger electoral competition pushes incumbent policymakers to substitute more salient taxes with the less salient ones with detrimental effects on the transparency of fiscal policy and electoral accountability.

But what is tax salience? It might be defined as visibility to the voters of a certain tax instrument or, analogously, as voters' awareness of the costs associated with specific government revenue sources. The intuition here is that voters are generally less likely to hold politicians to account for the associated tax burden of a less salient instrument. This in turn implies that strategic politicians will more heavily rely on less salient revenue sources when electoral competition is stronger.

In order to demonstrate this idea, the authors first develop a political agency model demonstrating that politicians in more competitive jurisdictions use less salient tax instruments more intensely.

The model verifies and refines the intuitions regarding this inverse relationship focusing on the behaviour of an incumbent local policymaker (a mayor), who is responsible for providing a local public good, and has the power to make decisions regarding its funding. Two different policy instruments to collect fiscal revenue are available, each differing in their degree of salience. When elections take place, voters base their decisions both on economic grounds and on ideology. As a result, mayors facing stronger electoral competition choose to rely relatively more on less salient revenue sources to decrease the overall “electoral cost” of raising funds. On the other hand, mayors facing moderate electoral competition have less of an incentive to hide their sources of revenues from voters, and rely relatively more on salient revenue sources.

In a second step they test their theoretical predictions empirically, concentrating the Italian experience thanks to a large dataset on Italian municipal financial data, census data, and ballot data of municipal elections from 1999 to 2008. The focus is on large municipalities, i.e., those with a population of more than 15,000 residents, cumulatively accounting for over 60 percent of the Italian population.

Italian municipalities derive their main tax revenues from a property tax (denoted ICI), but they also heavily rely on many other sources of revenues, such as waste-management taxes, personal income surtaxes, and a vast array of fees and charges.

Generally speaking, property taxes are considered as a highly salient tax while other tax instruments are much less visible at the eyes of public. Indeed, taxpayers often perceive this tax as an unfair burden on a necessity (the home in which they live). What they do ignore is that taxing properties is not only widely recognized as one of the most efficient and least distorting tax instrument available for governments to raise money but also in terms of reducing long-run GDP per capita.

Voters perceive the role the mayor plays in setting “visible” taxes, but they often lack understanding of how much leverage and freedom a mayor has in setting government fees and charges.

The empirical analysis starts by distinguishing the sources of revenues in more or less salient instruments in the hands of policymakers. In particular, the sources of revenues included in the analysis are subdivided into two categories: revenues from taxes on the one hand include the property tax (ICI), the waste-disposal tax (TARSU/TIA), and the sum of municipal income surtax and the electricity surcharge, while on the other hand revenues from fees and charges, comprising fees for general services and other services.

For each of them, the authors investigate the interaction between mayors’ popularity and the types of revenue sources he or she use and find that the probability of a mayor’s re-election depends (negatively) on the extent of the property tax, the most salient tax instrument, but not on the other sources of revenues, fees and charges, the least salient.

Then they test the central theoretical model’s predictions, the link between electoral competition and tax-mix choices. Controlling for a wide array of alternative channels, ideological characteristics of the mayor and voters, samples, and estimation techniques, a main consistent result emerges: 1 percent decrease in the margin of victory (i.e., the difference in the vote share) between the elected mayor and her challenger generates a 0.53 euro drop in the per-capita tax revenue from ICI (the main property tax in Italy) and a simultaneous increase in revenues from fees for “local services” by 0.66 euro per-capita. In other words, mayors who won with a narrower margin of victory, a sign of stiffer electoral competition, were more likely to increase the proportion of revenue coming from fees, as opposed to taxes. Analogously, mayors who won with broader margin are less likely to resort to fees over taxes. This behaviour is unaffected by the political affiliation of the mayor. Consistent with the initial hypothesis, electoral cycles also play an important role in shaping tax- and fee-setting decisions. Moreover, the substitution between fees and taxes occurs mainly in the years close to elections. To put it differently, the effect is stronger when elections are approaching, and when candidates face more political competition.

To sum up, this study aims at enriching our understanding of the interplay between electoral incentives and political accountability. In general, elections are commonly seen as a positive force that improves political selection and disciplines politicians. However, the present paper challenges this interpretation by providing strong empirical evidence. Whenever policymakers can choose between an array of policy instruments with various degrees of salience, they will also disproportionately use the least salient tool when their election is at greater risk or when voters are more sensitive to policy decisions in the pre-election period. This, in turn, weakens the positive role that elections are playing in keeping politicians accountable to voters.

 

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Council size, government spending and efficiency. Evidence from a quasi-experimental design for italian municipalities

 Marco Alberto De Benedetto, 2018 - Politica economica – Journal of Economic Policy 

In modern democracies do politicians allocate resources efficiently?

A conspicuous body of literature has tried to understand how politicians make decisions, especially in terms of budget choices and how executive fragmentation (i.e. the number of spending legislators) affects governments’ budgets.

According to the Public Choice theory, especially relying on Tullock’s (1959) and Buchanan and Tullock’s approaches (1962), politicians, in order to obtain a greater electoral support, try to satisfy the needs of particular groups of constituencies to the detriment of the general community. In fact, government spending typically benefits a narrow segment of the population, whereas taxes are distributed broadly.

In a new piece of research, “Council Size, Government Spending and Efficiency. Evidence from a Quasi-experimental Design for Italian Municipalities” in Politica Economica – Journal of Economic Policy, Marco Alberto De Benedetto presents new evidence about the relationship between legislature size, government spending and the level of efficiency at the local level in Italy. Indeed, investigating the effect of legislature size on government spending, especially at local level, is a relevant issue in the current debate since municipalities provide public goods and services, such as the management of public utilities, transportation and nursery schools, assistance of elderly people and waste collection that have a big and direct effect on citizens’ daily lives.

The empirical analysis is based on a rich panel dataset on municipal budgets over the period 2001-2007, provided by the Italian Ministry of the Internal Affairs, of approximately 6,576 local governments, containing information on both inflows and outflows.

The available data on the number of councilors within each municipality allow to implement a Sharp Regression Discontinuity Design (RDD). Exploiting the Legislative Decree n. 267/2000, in fact, the Italian law establishes that the municipal council is composed by the mayor and by a variable number of local legislators, i.e. councillors, which depends on municipal population size. The idea behind the Sharp RDD methodology is therefore to compare municipalities just above the population size thresholds to municipalities just below it in order to distinguish the causal effect of legislature size on local expenditures; indeed, unobservable characteristics should not vary discontinuously around the cut-off and then the cut-off rule provides exogenous variations in the treatment «as good as a randomized experiment».

Overall, results highlight a negative and statistically significant effect of council size on total expenditures. In particular, if the council size increases by 1 unit, the total municipal expenditures per capita decrease by 0.4%. Furthermore, in order to reinforce the hypothesis that an agency problem in terms of spending could rise between legislators and bureaucrats, the author focused on expenditures that are more directly under control of bureaucrats, i.e. current expenditures per capita, after controlling for the share of employees within local governments, for a proxy of the quality of public goods and services provided by local governments (the ratio between waste recycling over total urban waste), and for a measure of population civicness, i.e. electoral participation. Also in this case, a negative effect of legislature size on government size at the municipal level in Italy emerges. Further results also highlight how council size positively affects some measures of efficiency/productivity at municipal level, namely the difference between revenues and expenditures, the speed of revenues collection and the speed of payment.

One possible interpretation of these findings is that an increase in the number of councilors leads to a better monitoring of bureaucrats in terms of spending, mitigating the agency problems between legislators and bureaucrats leading to a lower level of spending and to a higher efficiency/productivity of municipalities.

Future research on this topic suggests to investigate whether the relationship between legislature size and government spending is non-monotonic (U-shape relationship). In fact, it may be the case that when legislature size is small, then an increase in the number of legislators leads to a better monitoring of bureaucrats in terms of spending, heightening the efficiency of the entire public administration. Conversely, the efficiency of the local administration might tend to reduce if legislature size is big enough to guarantee a good management of the «public pursue».

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https://www.rivisteweb.it/doi/10.1429/92122

Local government

 
Italian Version English Version    

How to design decentralisation to curb secessionist pressures? Top-down vs. bottom-up reforms (Cerniglia F., Longaretti R., Zanardi A.)

Italian Version English Version

The sacred and the profane of budget cycles: evidence from Italian municipalities (Revelli F., Zotti R.)

Italian Version English Version              

Political competition, tax salience and accountability Theory and evidence from Italy. (Bracco E., Porcelli F., Redoano M.)

Italian Version English Version  

Council size, government spending and efficiency. Evidence from a quasi-experimental design for italian municipalities (De Benedetto M. A.)

Italian fiscal system: theory and policy

 
Italian Version English Version    

Balancing the equity-efficiency trade-off in personal income taxation: an evolutionary approach (Pellegrino S., Perboli G., Squillero G.)

Italian Version English Version    

The heterogeneous effects of labor informality on VAT revenues: Evidence on a developed country (Di Caro P., Sacchi A.)

Italian Version English Version    

Problems and perspectives of the Italian fiscal system: from theory to policy

Italian Version English Version    

MIRRLEES’ AND DE VITI DE MARCO’S FISCAL SYSTEMS. New insights from the history of economic thought. (Vitaletti G.)

Welfare programs / Pensions

Italian Version English Version    

Grandparental availability for child care and maternal labor force participation: pension reform evidence from Italy (Bratti M., Frattini T., Scervini F.)

Gender gaps in political empowerment

Italian Version English Version    

Let the voters choose women (Baltrunaite A., Casarico A., Profeta P., Savio G.)

Fiscal decentralization and health

 
Italian Version English Version    

Does fiscal decentralization affect regional disparities in health? Quasi-experimental evidence from Italy ( Di Novi C. , Piacenza M., Robone S., Turati G.)

International fiscal issues

 
Italian Version English Version    

Fiscal devaluation and relative prices: evidence from the Euro area (Arachi G., Assisi D.)

Covid 19

 
Italian Version English Version  

The “Great Lockdown” and its determinants (Ferraresi M., Kotsogiannis C., Rizzo L., Secomandi R.)

Health issues and Healthcare provision

 
Italian Version English Version    

Does higher Institutional Quality improve the Appropriateness of Healthcare Provision? (De Luca G., Lisi D., Martorana M., Siciliani L.)

Social Capital

 
Italian Version English Version  

Was Banfield right? New insights from a nationwide laboratory experiment (Aassve A., Conzo P., Mattioli F.)