Partial fiscal decentralization and sub-national government fiscal discipline: empirical evidence from OECD countries
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Recent theoretical research suggests that financing sub-national governments’ expenditure out of own revenue sources is linked to more responsible budgeting, because the financial implications of spending decisions then are internalized within a jurisdiction. We test this proposition empirically on a sample of 23 OECD countries over the 1975–2000 period, and find evidence in line with the hypothesis that greater revenue decentralization (measured as sub-national governments’ share of own source tax revenues in general government tax revenue) is associated with improved sub-national government budget deficits/surpluses. This finding is cross-validated with a novel, independent dataset consisting of all 34 OECD member states from 2002 to 2008.
KeywordsFiscal federalism Revenue autonomy Budget deficits
JEL codesH62 H71 H77 E61
We are grateful to two anonymous referees as well as seminar participants at European Commission, WZB Berlin, ZEW Mannheim and Armenian Economic Association for valuable comments. This paper is based on the strongly revised version of the following discussion paper that appeared in European Economy, Economic Papers No. 501, July 2013. All three authors acknowledge financial support by the European Commission (Grant No. ECFIN/2012/195/633456). Benny Geys also acknowledges financial support from FWO Vlaanderen (Grant No. G.0022.12).
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