“TOWARDS A FISCAL CLEARING HOUSE FOR THE EU?”
JEL classification: H77, H87
Within federal as well as unitary states intergovernmental grant systems are used for a number of reasons, which include:
-         re-distribution from rich to poor jurisdictions;
-         mitigation of a-symmetric economic shocks;
-         compensation of fiscal externalities which occur between jurisdictions.
Intergovernmental grant systems can be of a purely horizontal nature but in most cases grant systems involve federal (or central) government.
Within the EU there is no system of intergovernmental grants, even though small-scale re-distribution between poor and rich member states occurs through the EU budget (notably through the EU’s cohesion policy) and member states are either net-contributors or net-receivers from that budget. Moreover, the EU “federal” budget is generally considered to be too small (appr. 1 % EU GNI) to be used to deal with economic shocks.
The absence of a grant system means that within the EU compensation of fiscal externalities is largely absent, apart from some voluntary horizontal arrangements between border states on specific issues (like in the case of Belgium and the Netherlands on the upkeep of the Westerschelde river and on the High Speed Line railway connection). This paper argues that externalities between EU member states can be squared without having a grant system in place, by simply using a fiscal clearing house to be operated by the European Commission.
The paper is organized as follows.
After a short introductory section, the concept of interjurisdictional fiscal externalities is dealt with. Interjurisdictional fiscal externalities occur when a government’s tax and expenditure decisions affect the well-being of taxpayers in other jurisdictions either directly by changing their consumer or producer prices or their public good provisions, or indirectly by altering the budget constraints (through tax revenues or expenditures) of other governments. An example of a –possible- fiscal externality is the establishment of a regional training centre for civil servants by the government of a jurisdiction which is also used by civil servants from neighbouring jurisdictions.
Subsequently, examples of fiscal externalities within the EU context are discussed, with a focus on the following sectors: (higher) education, health, social security and infrastructure. The magnitude of fiscal externalities between member states in these areas will be –tentatively- estimated.
Finally, the idea of a fiscal clearing house is put forward and the conditions for running such a clearing house are discussed in more detail.