Fiscal Decentralisation in the Netherlands: History, Current Practice and Economic Theory

CPB Netherlands Bureau of Economic Policy Analysis Working Paper No. 214

62 Pages Posted: 19 Jan 2011 Last revised: 11 Aug 2012

See all articles by Frits Bos

Frits Bos

CPB Netherlands Bureau of Economic Policy Analysis

Date Written: December 3, 2010

Abstract

This paper describes and discusses the division of tasks between Dutch central and local government and their financing in view of economic theory. The paper starts with an overview of the first and second generation theories of fiscal decentralisation. This theoretical perspective is used for analysing the history of Dutch fiscal decentralisation and the current tasks and financing of Dutch municipalities and provinces. What went wrong with the famous Dutch Republic of United Provinces, the first federal state in modern history? Should Dutch municipalities increase further in scale, like their counterparts in Denmark? Is the Dutch government right in wanting to abolish city-regions? Is there still a role for Dutch provinces in spatial planning?

The history of fiscal decentralisation in the Netherlands reveals major shifts from centralisation towards decentralisation and vice versa. The Dutch Republic of the United Provinces was the first federal state in modern history. Due to institutions focused on stimulating trade and growth, it became the richest country in the world. However, after this Golden Age of the Dutch republic, the decentralised decision-making system was not able to reform and meet the challenges of wars with France, England and Prussia and the rise of mercantilism and protectionism in Europe.

The French army helped to break up the political deadlock and helped to install a unitary and French-style state with a central government bureaucracy, a constitution, a national tax system and the abolishment of provinces.

After the departure of the French, the United Kingdom of the Netherlands started. The power of the King and the loss of political power of cities and provinces made a much more efficient routing of roads and canals possible. However, unsustainable public finance made that the autocratic rule by the King was not accepted anymore. The King abdicated, the constitution was changed and Parliament was given more power. Current fiscal decentralisation still reflects to a great extent the constitution of 1848. This constitution was designed by the liberal Prime Minister Thorbecke. It introduced elections for those paying taxes and divided the responsibilities over the central government, provinces and municipalities (‘Thorbecke’s house’); provinces were reinstalled but given a much less prominent role than in the Republic.

In the period up to 1928, government wanted to modernise the economy and reduce social problems. Municipalities played a major role in this, e.g. by improving education and infrastructure and giving poor relief. However, the rising expenditure by municipalities was financed by increasing debt and all kinds of local taxes related to income and wealth. This generated migration by the rich and the gap between rich and poor municipalities widened rapidly.

In 1929, this was resolved by abolishing several local taxes related to income and to introduce a municipality fund organised by the central government. During the next fifty years, a centralised welfare state was constructed. The Dutch central government tried to direct the development of the Dutch economy and society via many new social benefits and specific transfers to local government, firms and non-profit institutions. During this period, Dutch public expenditure increased to over 60% GDP. The welfare state had an adverse effect on employment and the Dutch economy and public finance became unsustainable. Since the 1980s, the Duch welfare state is therefore being redesigned into a smaller and more decentral welfare state. This implied privatisation, deregulation and decentralisation and a greater role for incentives and performance management. Social assistance and public care services have become more the responsibility of municipalities. The number of specific transfers is reduced, while the general transfers to provinces and municipalities are increased.

Since the start of Thorbecke’s house, the number of municipalities is drastically decreased, from 1209 in 1850 to currently 430. Economic theory provides various arguments for enlarging municipalities, like more efficient allocation by internalising more external effects, increase in efficiency due to larger scale, a rising minimum scale due to more and more complex tasks and reducing the vulnerability for local lobbies and personal interest.

At present, the major part of the Dutch municipalities is rather small: 10% has less than 10 thousand inhabitants, 25% has between 10 and 20 thousand inhabitants and for 20% the number of inhabitants is between 20 and 30 thousand inhabitants. The central government policy to allocate more and more complex tasks to municipalities enforces a further scaling up of municipalities. The scale and geographic delimitation of municipalities and provinces should take account of the major external effects. In urban regions, this suggests scaling up of municipalities or very strong cooperation, like in the current city-region arrangements. The commuting patterns suggest that the 150 year old boundaries of provinces are not very efficient for spatial planning; this task is better to be mainly divided over municipalities and the central government. Several other proposals for improving fiscal decentralistion in the Netherlands are also made, e.g. • Municipal taxes should be extended by incorporating the central government’s taxes on owning and buying a house; • The current complex and arbitrary formula for the general transfer to municipalities and provinces should be replaced by a link to GDP; • The number of earmarked transfers should be limited and they should not to be defined too strictly.

Keywords: Fiscal federalism, Subsidiarity, History of Dutch public finance, Local governance, Dutch Republic of United Provinces, Spatial planning, Oates, Tiebout, Dutch municipalities, Dutch provinices, Waterboards, Infrastructure, Local taxes, Thorbecke]

JEL Classification: D70, H11, H70, N43, N44

Suggested Citation

Bos, Frits, Fiscal Decentralisation in the Netherlands: History, Current Practice and Economic Theory (December 3, 2010). CPB Netherlands Bureau of Economic Policy Analysis Working Paper No. 214, Available at SSRN: https://ssrn.com/abstract=1742179 or http://dx.doi.org/10.2139/ssrn.1742179

Frits Bos (Contact Author)

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

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