Looking at Subnational Governments from a Global Perspective: The New and Unique Findings of the World Observatory on Subnational Government Finance and Investment (SNG-WOFI)

The SNG-WOFI initiative collects comparable data on national, subnational, regional, and municipal government finance flows in order to enable informed and targeted policy-making. Following are the latest key findings of the Observatory as presented at its international conference on June 17, 2019 in Paris, France, summarised for URBANET by Isabelle Chatry, Senior Policy Analyst at the OECD.

Subnational governments are key economic and social actors, accounting for a significant share of public spending and investment. There are, however, strong discrepancies across countries, geographical areas, and income country groups that reflect the diversity among multi-level governance systems around the world, including their structure and the degree of decentralisation.

Subnational Government Structure Around the World is Very Diverse

Overall, the World Observatory has identified 637,900 subnational governments in the 122 countries surveyed. This includes 624,166 municipal-level entities, 11,965 intermediate governments and 1,769 state and regional governments. The municipal average size is quite large at global level, amounting to 63,000 inhabitants. In Africa and Asia-Pacific, the average size is around 130,000 inhabitants while it is less than 30,000 inhabitants in Europe, Euro-Asia, and North America.

Subnational Government Structure Around the World Evolves Continuously

Multi-level governance systems experience frequent changes and adjustments. Territorial reforms can consist of creating new territories or rescaling existing administrative boundaries. In Asia-Pacific and Africa, the number of local entities tends to grow, a situation which can be partly related to on-going processes of decentralisation.

These trends contrast with those observed in Europe, where the number of municipalities tends to decrease through municipal amalgamations as a way of generating economies of scale and efficiency gains, resulting in an increase of the municipal average size. Finding the right scale in service provision while preserving a certain form of proximity has also motivated policies fostering inter-municipal cooperation and improving metropolitan governance in large urban areas.

The Way in Which Responsibilities Are Assigned Is Often Complex and Lacks Clarity

A large number of countries have undergone decentralisation – but also recentralisation – reforms in the past two decades. There is a wide variety in the distribution of responsibilities across levels of government across countries. Overall, education, social protection, general public services, and health are the primary areas of subnational spending as both a share of Gross Domestic Product (GDP) and share of subnational government expenditure.

Most responsibilities are shared across levels of government. In addition, there is a growing trend of asymmetric assignment of responsibilities within the same level of government. As a result, the breakdown of competences across and within levels of government tends to be more and more complex in many countries. It sometimes leads to competing and overlapping competences and a lack of visibility and accountability concerning public policies.

One Quarter of Public Spending Is Done at the Subnational Level

In 2016, subnational government spending accounted for 24.1 per cent of total public spending and 8.6 per cent of GDP on unweighted average at global level. High-income countries tend to have a significant greater subnational share in total public spending and GDP than low-income countries.

Subnational government expenditure accounts for 35 per cent of public expenditure in the Asia-Pacific region, which is the highest ratio in all five regions, ahead of Europe and North America (28 per cent). As a share of GDP, however, Europe and North America rank first. For both ratios, Africa ranks last among the five regions.

Subnational Governments Play a Key Role in Public Investment Worldwide

In 2016, subnational government investment amounted to 36.6 per cent of total public investment on unweighted average. This share, however, differs widely across countries: from playing almost no role to a key role. It exceeds 50 per cent of public investment in 36 countries, and even 65 per cent in 17 countries.

Overall, regarding their share of public investment, subnational governments play a more significant role in federal countries than in unitary (59 per cent versus 32 per cent), and high and upper middle income countries. In Africa, subnational investment represents less than 20 per cent of total public investment, while in Asia-Pacific, it reaches 41 per cent.

However, the share of subnational investment in GDP remains low in many countries, accounting for only 1.3 per cent on average at global level. It is even less in low-income countries (1.1 per cent) and in Africa (0.9 per cent) while it reaches 1.8 per cent in Asia-Pacific.

Subnational Governments Still Depend Largely on Grants for More Than Half of Their Revenue

Grants represent 51 per cent of revenues of subnational governments, followed by taxes (33 per cent), user charges and fees (9 per cent) and property income. In many countries, there are significant fiscal imbalances, as a large part of subnational spending depends on central government transfers and subsidies.

The share of tax revenue ranges from zero in countries where the subnational government cannot raise or receive taxes, to more than 70 per cent in India, Iceland, Cambodia, Tajikistan, Argentina and Zimbabwe. Subnational government tax revenue accounts for 3.3 per cent of GDP on average. In 40 countries, it accounts however for less than 1 per cent of GDP while in 15 countries, it exceeds 8 per cent of GDP, the highest levels being found in Germany, Denmark, Argentina, Sweden, and Canada.