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8. Fiscal Federalism. The Transition to a New Model of Fiscal Relations
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Fiscal Federalism 241 Fiscal Federalism the transition to a new model oF Fiscal relations Koen Algoed and Frédérique Denil 1 1. introduction Federalism in Belgium is an evolving process towards growing decentralisation of responsibilities and revenue. For more than 40 years, various institutional reforms have played an essential role in designing revenue and responsibilities of the Regions and the Communities. The last decade has seen the implementation of the Lambermont agreement and the adoption of the Sixth Reform of the State. While the Lambermont agreement has mainly affected the pattern of funding mechanisms of the sub-national entities, the Sixth Reform of the State seems to organise a major step in the decentralisation of responsibilities as well as their financing. In this way, the reform is expected to increase the role of the Regions and the Communities in the allocation of public goods and services as in the use of taxing power, allowing these entities to better align their policies to their own preferences and priorities. But this reform is also the result of a long bargaining process due to the difficulty of reconciling different principles and the absence of additional funding by the Federal Government given the fiscal outlook of Entity I (Federal Government + Social Security). 1. Koen Algoed is Director of Cabinet of the Flemish Minister for Finance, Budget,Work,Town and Country Planning and Sports. Frédérique Denil is Advisor at the Federal Public Service (FPS) Finance (Research Department) and member of the Secretariat of the High Council of Finance.The authors wish to thank Etienne de Callataÿ for his helpful comments. 8. 242 The Return of the Deficit In this paper, we study therefore the process of the Sixth Reform of the State and its impact as a key issue of fiscal federalism in Belgium. A comparison will be done with the arrangements implemented over the past decade, developing to some extent the challenges involved by the Lambermont Agreement. Much attention is therefore paid to the last institutional agreement in this paper while it is still not implemented. Indeed, the negotiation process started several years ago and has also influenced fiscal federalism in Belgium during the last decade. It seems furthermore rather irrelevant to limit the analysis to a system which is now virtually obsolete. The first part of this paper studies the reform process that occurred over the past decade from a political economy perspective. In the second part, the impact of the Sixth Reform of the State on the Regions and the Communities will be analysed in more details. To this end, an attempt to estimate the budgetary effects of the Reform on the different governments will be made on the basis of simulations. As these rely on provisional parameters and on various assumptions, they must be interpreted with caution. A third part concludes. 2. Political economy of the reforms over the last decade In Belgium as in most of other Federal States, fiscal federalism results from political motivations for decentralisation and organises this decentralisation by designing revenue and responsibilities to the Regions and the Communities, following to some extent arguments of the fiscal federalism theory. The decentralisation process started in Belgium in 1970 with the creation of the Regions and the Communities. They have been assigned at this time limited expenditure and legislative powers. The Regions have been provided goods and services linked to the territory, while the Communities have been allocated national public goods related to [3.235.199.19] Project MUSE (2024-03-19 11:13 GMT) Fiscal Federalism 243 individuals2 . The overlapping of these two categories of sub-central entities is one of the specific characteristics of the institutional set-up in Belgium and complied with the different political requirements regarding decentralisation across the northern part and the southern part of the country. The Flemish population (northern part) supported indeed the creation of languages Communities on which cultural identity can be build up while the French-speaking population (southern part) had more interest in the decentralisation of economic affairs that are carried out by territorial entities (including a specific entity for Brussels). This overlapping had significantly influenced the negotiation process of the various institutional reforms as well as their output. The Communities have for instance no taxing power since the Flemish and French-Speaking Communities share the responsibilities in the area of the Brussels-Capital Region. Tax autonomy would indeed involve a difficult trade-off between more accountability and tax competition. Moreover, such taxing power would have...