Partial fiscal decentralization and sub-national government fiscal discipline: empirical evidence from OECD countries
- 734 Downloads
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).
- Asatryan, Z., & Feld, L. P. (2015). Revisiting the link between growth and federalism: A Bayesian model averaging approach. Journal of Comparative Economics. doi: 10.1016/j.jce.2014.04.005.
- Baskaran, T. (2012). Tax decentralization and public deficits in OECD countries. Publius: The Journal of Federalism, 42, 688–707.Google Scholar
- Baskaran, T. (2014). Bailouts and austerity. Discussion Paper 212, University of Goettingen.Google Scholar
- Blöchliger, H., & Petzold, O. (2009). Taxes and grants: On the revenue mix of sub-central governments. Working Paper 7, OECD.Google Scholar
- Brennan, G., & Buchanan, J. (1980). The power to tax: Analytical foundations of a fiscal constitution. New York: Cambridge University Press.Google Scholar
- Ebel, R.D., & Yilmaz, S. (2002). On the measurement and impact of fiscal decentralization. Working Paper 2809, World Bank Policy Research.Google Scholar
- Fornasari, F., Webb, S. B., & Zou, H. (2000). The macroeconomic impact of decentralized spending and deficits: International evidence. Annals of Economics and Finance, 1, 403–433.Google Scholar
- Hettich, W., & Winer, S. (1988). Economic and political foundations of tax structure. American Economic Review, 78, 701–712.Google Scholar
- IMF (2009). Macro policy lessons for a sound design of fiscal decentralization. Washington: IMF.Google Scholar
- IMF (2012). Fiscal monitor: Balancing fiscal policy risks. Washington: IMF.Google Scholar
- Oates, W. E. (1972). Fiscal federalism. London: Harcourt Brace.Google Scholar
- Plekhanov, A., & Singh, R. (2006). How should subnational government borrowing be regulated? Some cross-country empirical evidence. IMF Staff Papers, 53, 426–452.Google Scholar