Abstract
The ongoing debate on the efficiency of a federal system versus a centralized system has lead to a diverse and unclear empirical picture of the effects of fiscal decentralization on public sector growth. For analyzing these effects it is crucial to consider the sub-national decision power on taxing and spending. In the current paper, we test for the effects of fiscal autonomy on total government expenditure using time series from 1955 to 2007 for Austria. Determinants of government expenditure are economic growth, fiscal illusion of policy makers, and the unemployment rate. We additionally account for different degrees of sub-national fiscal autonomy. Our econometric results suggest that the often-hypothesized dampening effects of fiscal autonomy cannot be corroborated for the Austrian system.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
This is also the reason why we concentrate on a single country (Austria) because consistent time series of fiscal policy variables across countries are not available in a disaggregated form for a longer time span.
The Austrian revenue sharing system is regulated by the Revenue Sharing Act (RSA) which is negotiated between federal government, states, and municipalities (see e.g., Fuentes et al. 2006; Bröthaler et al. 2006). Usually the negotiations are based on political consensus, although the legal position of the sub-national governments is weak. The RSA determines the types of taxes to be assigned to the levels of government (own taxes) and the taxes to be shared between them. It defines the distribution formula for the shared taxes and also specifies major transfer flows between the public authorities. The RSA is usually valid for 3 to 6 years.
In our approach, we follow the standard model of explaining government expenditures (as a ratio to GDP) as a function, among others, of GDP per capita, fluctuations of GDP, and net surplus (as a ratio to GDP). It has, however, been criticized by a reviewer that there may be some multicollinearity in the estimations. With our model choice (estimating Wagner’s Law, cf. Peacock and Scott 2000), we cannot overcome this non-trivial problem.
The positive income-government expenditure relation was, in the past, also complemented by the importance of the cost increases in the public sector compared to the private sector. Baumol’s cost disease, made operational by the relation between the price levels for private and public goods and services, proved to be of significant explanatory power in earlier papers (Neck and Getzner 2007). However, as we focus on fiscal autonomy rather than painting a complete picture of the determinants of expenditure growth, we leave out this variable which also bears some uncertainties in terms of the measurement of the price levels, in particular of public goods and services. Furthermore, the composition of the Austrian population in terms of age groups was tested as explanatory variables as well (cf. Fiva 2006; Rodden 2003). The results are inconclusive, with changing significance of the variables. We therefore do not consider this potentially important variable due to an unclear direction of its influence.
At the moment of writing this paper, consistent time series for the variables used in the empirical model are available only until 2007. It has to be left to future research whether the recent economic and financial crisis had an impact on the federal system in Austria.
References
Akai, N., & Sakata, M. (2002). Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States. Journal of Urban Economics, 52, 93–108.
Baumgartner, J., Kaniovski, S., Walterskirchen, E. (2009). Repercussions of financial market crisis weighing on medium-term growth—projections for the austrian economy until 2013. WIFO (Austrian Institute of economic research) Quarterly, 1/2009, 11–22.
Bergvall, D., Charbit, C., Kraan, D.-J., Merk, O. (2006). Intergovernmental transfers and decentralised public spending. OECD network on fiscal relations across levels of government, ECO/GOV/WP(2006)/3.
Blöchliger, H., King, D. (2006). Fiscal autonomy of sub-central government. OECD network on fiscal relations across levels of government, Working Paper No. 2.
Brennan, G., & Buchanan, J. (1980). The power to tax: analytical foundations of a fiscal constitution. Cambridge: Cambridge University Press.
Bröthaler, J. (2007). Einnahmenautonomie auf der regionalen und kommunalen Ebene in Österreich—langfristige Entwicklungstrends [Revenue Autonomy on the Regional and Local Level in Austria—Long Term Trends]. In Bauer, H., Schratzenstaller, M., (Eds.). Stärkung der subnationalen Steuerautonomie und intragovernmentale Transfers, Öffentliches Management und Finanzwirtschaft 7, Wien/Graz, 32–61.
Bröthaler, J., Bauer, H., Schönbäck, W. (2006). Österreichs Gemeinden im Netz der finanziellen Transfers—Steuerung, Förderung, Belastung [Austrian Municipalities in the Network of Financial Transfers—Governance, Promotion, Burden]. SpringerWienNewYork, Wien.
Bröthaler, J., & Getzner, M. (2010). Effects of fiscal decentralization on public sector growth in Austria. Public Finance and Management, 10(1), 169–205.
Darby, J., Muscatelli, A., Roy, G. (2002). Fiscal federalism and fiscal autonomy: lessons for the UK from other industrialised countries. University of Glasgow, WP 2002/12.
Ebel, R. D., Yilmaz, S. (2002). On the measurement and impact of fiscal decentralization. World Bank Policy Research Working Paper No. 2809, Washington.
ESA 95, European System of Accounts 1995. Eurostat, Brussel, 1996.
Eurostat (2010). Government finance statistics, database on economy and finance, ec.europa.eu/eurostat (Jan. 2010).
Feld, L. P., & Matsusaka, J. G. (2003). Budget referendums and government spending: evidence from Swiss cantons. Journal of Public Economics, 87(12), 2703–2724.
Fiva, J. H. (2006). New evidence on the effect of fiscal decentralization on the size and composition of government spending. Finanzarchiv, 62(2), 250–280.
Freitag, M., & Vatter, A. (2004). Föderalismus und staatliche Verschuldung. Ein makro-quantitativer Vergleich [Federalism and Public Debt, A Macro-quantitative Comparison]. Österreichische Zeitschrift für Politikwissenschaft, 33(2), 175–190.
Freitag, M., & Vatter, A. (2008). Decentralization and fiscal discipline in sub-national governments: evidence from the swiss federal system. Publius: The Journal of Federalism, 38(2), 272–294.
Fuentes, A., Wurzel, E., Wörgötter, A. (2006). Reforming federal fiscal relations in Austria. OECD Economics Department Working Papers, No. 474, OECD Publishing.
Getzner, M., Glatzer, E., & Neck, R. (2001). On the sustainability of Austrian budgetary policy. Empirica, 28(1), 21–40.
Getzner, M., & Neck, R. (2002). Die Entwicklung der Staatsausgaben in Österreich [Development of Government Expenditure in Austria]. In E. Theurl, H. Winner, & R. Sausgruber (Eds.), Kompendium der Österreichischen Finanzpolitik (pp. 228–262). Vienna/New York: Springer.
IMF (2010), International monetary fund. Government Finance Statistics. www.imfstatistics.org/gfs, Washington.
Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inferences on cointegration—with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210.
Meloche, J.-P., Vaillancourt, F., Yilmaz, S. (2004). Decentralization or fiscal autonomy? What does really matter? Effects on growth and public sector size in European Transition Countries. World Bank Policy Research Working Paper 3254.
Neck, R., & Getzner, M. (2001). Politico-economic determinants of public debt growth: a case study for Austria. Public Choice, 109(3–4), 243–268.
Neck, R., & Getzner, M. (2007). Austrian government expenditures: ‘Wagner’s Law’ or ‘Baumol’s Cost Disease’? International Business & Economics Research Journal, 6(11), 49–65.
Oates, W. E. (1972). Fiscal federalism. New York: Harcourt, Brace & Jovanovich.
OECD (2010). National accounts statistics and revenue statistics, Statistical online databases, www.oecd.org (Jan. 2010).
Peacock, A., & Scott, A. (2000). The curious attraction of Wagner’s law. Public Choice, 102(1), 1–17.
Ribstein, L. E., & Kobayashi, B. (2007). Introduction. In L. E. Ribstein & B. Kobayashi (Eds.), Economics of federalism. Cheltenham: Edward Elgar.
Rodden, J. (2002). The Dilemma of fiscal federalism, grants and fiscal performance around the world. American Journal of Political Science, 46(3), 670–687.
Rodden, J. (2003). Reviving Leviathan: Fiscal Federalism and the Growth of Government. International Organization, 57(3), 695–729.
Shadbegian, R. J. (1999). Fiscal Federalism, collusion, and government size. Evidence from the states. Public Finance Review, 27(3), 262–281.
Statistics Austria (2009). Public finance statistics for Austria, revenue and expenditure data on public accounts 1955–2007, non-financial accounts of general government 1995–2007, tax statistics 1955–2007, Gebarungsübersichten/Gebarungen und Sektor Staat 1976–2007. ISIS Database and www.statistik.at (2009), Vienna.
Stegarescu, D. (2005). Public sector decentralisation: measurement concepts and recent international trends. Fiscal Studies, 26(3), 301–333.
Thiessen, U. (2006). Fiscal decentralization and economic growth in high-income OECD countries. In H. Bauer, H. Handler, & M. Schratzenstaller (Eds.), Finanzmanagement im föderalen Staat. Wien: Internationale & nationale Reformansätze.
Tiebout, C. M. (1956). A pure theory of local expenditure. Journal of Political Economy, 64(5), 416–424.
Wörgötter, A. (2006). OECD Recommendations for improving fiscal-federal relations. In Bauer, H., Handler, H., Schratzenstaller, M., (Eds.). Finanzmanagement im föderalen Staat Internationale & nationale Reformansätze, Öffentliches Management und Finanzwirtschaft Bd. 5, 70–87.
World Bank (2009). Decentralization & sub-national regional economics, topics on intergovernmental fiscal relations, data note on measuring fiscal decentralization. worldbank.org/publicsector/decentralization (03/2009).
Acknowledgements
We thank the participants of the 69th International Atlantic Economic Conference, Session on Public Finance Issues, in Prague, Czech Republic 24–27 March 2010 for their critical and helpful comments on the first draft of the paper, and two anonymous reviewers for most helpful suggestions for revision. All errors are of course those of the authors.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Bröthaler, J., Getzner, M. Fiscal Autonomy and Total Government Expenditure: An Austrian Case-study. Int Adv Econ Res 17, 134–156 (2011). https://doi.org/10.1007/s11294-011-9301-8
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11294-011-9301-8