This paper examines key aspects of the ongoing decentralisation process in transition economies and identifies areas where the present systems can have potentially adverse impacts on both service delivery and macroeconomic performance. We discuss three critical principles of a sound and efficient decentralised fiscal system – which are then contrasted with actual trends and policies in these countries. Comparative Economic Studies (2006) 48, 100–131. doi:10.1057/palgrave.ces.8100063