Adapting intergovernmental fiscal transfers for the future: Emerging trends and innovative approaches

Intergovernmental fiscal transfers (IFTs) play a crucial role in addressing vertical and horizontal imbalances, promoting equitable service delivery, and aligning local spending with national priorities across OECD countries. However, their design involves navigating complex trade-offs between equity, efficiency, transparency, and autonomy. This paper reviews the theoretical framework of IFTs, aiming to dissect their objectives, incentives, and outcomes, and to clarify their classification. A significant contribution of this study involves new data that tracks IFTs across the OECD, revealing that transfers from central to subnational governments increased across all countries studied during the COVID-19 pandemic. While there have been no radical changes in IFTs in recent years, emerging trends such as performance-based grants, Ecological Fiscal Transfers, links with regional policy, and new budgeting techniques suggest potential avenues for reform. By understanding the present dynamics and trends, this study aspires to pave the way for more informed, strategic, and beneficial fiscal transfer policies in the years to come, ensuring that these transfers continue to serve their intended purposes effectively while adapting to changing economic and social conditions across OECD countries.