Decentralization and the duration of fiscal consolidation: Shifting the burden across layers of government

This paper analyses the relationship between fiscal decentralization, the duration of fiscal consolidation episodes, and their success for 17 OECD countries between 1978 and 2009. The consolidation of the general government budget appears to be of longer duration when expenditure decentralization is higher. We also find that transfers from higher levels of government are cut during consolidation episodes, suggesting that central governments shift the burden of consolidation towards lower tiers of government. This is especially true when the latter have little legal autonomy to raise tax revenues and have little influence over executive decisions taken at the central level. We document that this increases local governments’ public debt/GDP ratios. In terms of the success of consolidation episodes, countries with a higher degree of decentralization appear to make smaller improvements in their primary balance when consolidating.

FOREMNY Dirk;  SACCHI Agnese;  SALOTTI Simone; 

2017-06-09

SPRINGER

JRC105948

0048-5829,   

https://rd.springer.com/article/10.1007/s11127-017-0441-0,    https://publications.jrc.ec.europa.eu/repository/handle/JRC105948,   

10.1007/s11127-017-0441-0,