Are fiscal adjustments less successful in decentralized governments?

Excessive borrowing by subnational governments is considered to be one of the perils of fiscal decentralization. On the other hand, fiscal decentralization might ensure the fiscal stability of the public sector by constraining Leviathan governments. Since the impact of decentralized government on fiscal outcomes is therefore ambiguous from a theoretical perspective, we explore this question empirically with a panel of 17 OECD countries over the 1975-2001 period. Our findings suggest that expenditure decentralization significantly reduces public indebtedness, whereas tax decentralization and vertical fiscal imbalances are insignificant.

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“…and Schaltegger and Feld (2009) who find for Switzerland that less centralized cantons are more likely to conduct successful fiscal adjustments.…”

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confidence: 99%

On the link between fiscal decentralization and public debt in OECD countries

Baskaran

2009

Public Choice

102

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“…A notable exception here is Schaltegger and Feld (2009), who suggest that more decentralized countries tend to be more successful in their consolidation strategies, although this result is based solely on data for the Swiss cantons. We use both descriptive statistics and simple econometrics to examine the relationship between decentralization and the numerical results achieved by the various consolidation episodes in our sample in terms of their effects on both the budget balance/GDP and the public debt/GDP ratios.…”

Section: Identificationmentioning

confidence: 71%

“…In the case of developed countries, Schaltegger and Feld (2009), in a case study of the Swiss cantons, find that fiscal centralization significantly reduces the probability of a successful fiscal consolidation, suggesting that competitive fiscal federalism may positively impact fiscal discipline. Darby et al's (2005) study of fiscal consolidations in OECD countries lends further support to the idea of the constructive participation of sub-national governments, with fiscal consolidations occurring at both central and sub-national levels.…”

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confidence: 99%

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

2017

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This paper analyzes 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 decisions are more decentralized. 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 greater degrees of decentralization appear to make smaller improvements in their primary balance when consolidating.

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“…However, the effects of fiscal decentralization on macroeconomic stability have never been settled in empirical literature. Recently, several studies have found either no effect or a positive effect of decentralization on fiscal performance and macroeconomic stability (Schaltegger and Feld 2009, Freitag and Vatter 2008, Shah 2005, Shome 2002, Stein 1999. There is also evidence that the effects of decentralization on macroeconomic stability depend on the level of economic development and what that may represent in terms of institutions.…”

Section: Fiscal Decentralization Fiscal Sustainability and Macroecomentioning

confidence: 99%

How Well Do Subnational Borrowing Regulations Work?

Martínez-Vázquez

Vulovic²

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Asian Development Bank InstituteThe Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI's working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. The authors are grateful to Yasin Civelek for his excellent research assistance.The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.Working papers are subject to formal revision and correction before they are finalized and considered published.Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, JapanTel:+81-3-3593-5500 Fax:+81-3-3593-5571 URL:www.adbi.org E-mail: info@adbi.org AbstractThere are many positive aspects associated with subnational borrowing, including additional funding and promoting intergenerational equity. However, it may also endanger fiscal sustainability and macro stability due to moral hazard and soft budget constraints, making borrowing controls justified and common. This study reviews the different types of ex-ante and ex-post subnational borrowing regulations used in the international experience based on a large panel of developed and developing countries. Each type of regulations has advantages and disadvantages, with varying suitability to a country's circumstances.It is found that the presence of subnational tax autonomy contributes to an increase in the general government primary balance but not significantly for subnational primary balances. A history of subnational bailouts is associated with lower primary balances, on average, at all levels. The "golden rule" and limits on debt and borrowing appear effective at all levels of government. However, none of the broad types of subnational borrowing regulations seem to have a distinct significant direct effect on the narrow definition of fiscal sustainability at the subnational level.

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Are fiscal adjustments less successful in decentralized governments?

Cited by 63 publications

References 35 publications

On the link between fiscal decentralization and public debt in OECD countries

On the link between fiscal decentralization and public debt in OECD countries

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

How Well Do Subnational Borrowing Regulations Work?

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