Fiscal Federalism in Transition Countries: The Three Baltic States Compared

Abstract

This paper analyzes three transition countries (Estonia, Latvia and Lithuania) regarding four essential features of fiscal federalism: (a) the administrative set-up, (b) the tasks and functions allocated to sub-national governments, (c) revenue structure and fiscal autonomy, and (d) fiscal discipline. The practices in the three countries are analyzed for the period 2001–2013 mainly, and compared to practices in the EU-28 at large. Compared to the EU average, fiscal disciplinary performance of the Baltic States (and of local governments) is adequate (and exemplary in Estonia). Tax autonomy of local governments is however very low in all three states; local governments rely heavily on their share in the personal income tax. The Baltic States differ significantly regarding their administrative set-up, but this is consistent with the huge variety in administrative set-up in Europe. In all three countries reform of the set-up is debated continuously. The overall absolute level of spending (in euro per inhabitant) by sub-national governments in the Baltic States is clearly below the EU-average. The shares of the main spending categories at sub-national level differ considerably from the EU-average. This is caused by specific choices regarding the division of tasks between local and central government (i.e. the result of relatively high or low levels of fiscal decentralization in certain policy fields) and/or general government differences (i.e. less or more spending in some policy fields in general).