Speech by Sean Dougherty, OECD Fiscal Network,
at the debate on “Towards a sound regional financial governance”
“Fiscal Autonomy, Equalization and AI Use for Good Governance”
Madam President, Deputy Minister, distinguished delegates, colleagues,
It’s an honor to return to the Chamber of Regions and to contribute to this important debate on strengthening regional financial governance. I speak today not only on behalf of the OECD, but also drawing from the work of the Network on Fiscal Relations across Levels of Government, which brings together delegates from across our member countries to tackle the practical challenges of multilevel governance.
At the heart of our shared agenda is a fundamental question: how can we ensure that regional governments are empowered—not just responsible—for delivering on today’s complex demands?
The OECD’s view is clear: sound financial governance must rest on three mutually reinforcing pillars—fiscal autonomy, equitable equalization, and strategic innovation.
Let me begin with fiscal autonomy, the cornerstone of effective subnational governance.
OECD evidence, as laid out in our flagship Fiscal Federalism 2022, shows that in most countries, subnational governments remain heavily dependent on intergovernmental transfers. Across OECD countries, only about 14% of subnational tax revenues are truly autonomous—where regional authorities have real discretion over both the rates and bases of their taxes. Central governments often retain substantial residual control.
This lack of autonomy poses several risks:
The OECD recommends expanding the use of taxes where regions can exercise discretion—such as surcharges on personal income or property taxes—and ensuring that tax autonomy is meaningful, not just nominal.
This aligns with the principles of the European Charter of Local Self-Government, especially Article 9, which stresses that regional authorities should have adequate financial resources of their own, which they may dispose of freely. The Fiscal Network is examining these issues further.
Real fiscal autonomy is also critical to enable regions to deliver on the environmental and clean transition. Subnational governments account for around two-thirds of public investment in OECD countries—particularly in climate-relevant sectors like transport, energy, water, and resilient infrastructure. Empowering regions financially is therefore essential not just for better governance, but also for achieving long-term climate goals, especially on adaptation.
Empowering regions in this way is not a luxury. It is a necessity—particularly when they are being asked to lead on climate policy, infrastructure, and public service delivery, often without fully funded mandates.
But autonomy alone is not enough. Equity of services matters.
In every country, regions differ in economic capacity, demographics, and service needs. A well-designed equalization system ensures that citizens enjoy comparable public services with comparable tax effort—regardless of where they live.
The OECD strongly supports fiscal equalization. But we also caution that equalization systems must preserve incentives for local effort, and there are different approaches to accomplish this, focused on costs or revenues. If the system punishes revenue growth or discourages cost efficiency, it can undermine both economic development and sound financial management.
Transparent, formula-based equalization—grounded in clear indicators and stable rules—works best, as shown in the OECD’s Fiscal Federalism report, where we benchmark fiscal equalization systems across countries.
This approach ensures predictability for regional budgets and fairness in horizontal or vertical redistribution.
This perspective is also consistent with Recommendation 2005(1) of the Council of Europe, which calls on member states to ensure that equalization arrangements promote equity and solidarity while still enabling authorities to act efficiently.
The third pillar—strategic policy innovation, particularly through AI—offers significant promise but also requires the right enabling conditions, in a time of dwindling resources.
At the OECD, we see growing interest in how artificial intelligence and digital tools can improve the quality and efficiency of regional services. Many of these applications are currently being discussed within the Fiscal Network, as part of an emerging form of “laboratory federalism”:
However, OECD data reveals that many subnational governments still lack the capacity, staffing, or financial flexibility to adopt, implement and govern these technologies safely and with sufficient trust from stakeholders.
This is where the connection becomes clear: AI will not compensate for weak financial governance. If regional governments lack the autonomy to allocate resources, or the incentives to innovate, then digital tools risk becoming token gestures rather than transformative solutions.
The Council of Europe’s new Framework Convention on AI, Human Rights, Democracy and the Rule of Law rightly emphasizes the ethical and governance dimensions of AI use. We agree, and this complements the OECD’s recently revised AI Principles. Notably, AI should empower—not bypass—democratic institutions.
To realize its potential, regions need both discretion and support: the ability to choose, and the capacity to implement the new technologies.
Let me close with a simple message: strong financial governance starts with trust in regions and local governments—not just to spend, but to decide, to innovate, and to lead.
By reinforcing fiscal autonomy, refining equalization, and investing in responsible innovation and AI use, we can ensure that regions are not only implementers, but genuine partners in shaping resilient, inclusive, and future-ready societies. Thank you.