Recent Development of Central-Local Financial Relations in Italy

Abstract

Italian local authorities share with those of other European countries a considerable degree of fragmentation. In addition, they suffer from the well-known North-South differential in economic conditions. On top of this, their management has long been split between the left-wing (mainly Communist) and the conservative (mainly Christian Democrat) political philosophy. This has rendered their performances and behaviour quite heterogeneous and has complicated the task of securing an equitable system of central-local financial relationships. For decades most of the southern authorities and the ‘red’ fraction of the centre-northern authorities have taken advantage of the possibility of borrowing for balancing the budget on the current account. This was a major loophole in the system until 1977. Bankruptcy was avoided ony through ‘entente’ between the Christian Democrats and the Communists in early 1978 (at the time of Mr Moro's murder), whereby all outstanding debt of local authorities was cancelled and transferred to the Central Government. In spite of an officially proclaimed ‘restraint’ there followed a period of real ‘Renaissance’ in local budgets, especially on the capital side. Borrowing—this time for capital expenditure—was again at the root of this development. Part of the deal was a revival of the ‘fiscal effort’ on the local side, making use of the few sources of own revenue left to local authorities after the fiscal reform of 1973–1974. Meanwhile, the ‘equalisation issue’ was raised with regard to the distribution of the general grant. Distribution criteria have been constantly changing since 1982. A completely new approach is now under consideration at the Ministry of Interior, based on the notion of ‘equal grant’ for ‘normal’ local authorities. Such an approach will eventually put aside the ‘past expenditure’ criterion which is still at the core of the grant distribution. While waiting for this reform, local authorities will almost certainly get a new local tax (‘tax for the financing of services’) starting in 1986.