Fiscal Institutions and the Relation between Central and Sub-National Government Fiscal Balances

Abstract

Skeptics of fiscal decentralization argue that it can complicate fiscal stabilization policies at the level of the central government because of uncoordinated fiscal actions by the national and sub-national tiers of government. However, panel data estimates for Organisation for Economic Co-operation and Development economies suggest that this danger has been overstated in that changes in the fiscal balances of central and sub-national governments are highly positively correlated. This result partly reflects the success of institutional arrangements that govern intergovernmental fiscal relations and appears unrelated to the extent of fiscal decentralization.

Public Debt Consolidation with Multi-Tier Governments: Rules Matter

“…-0.68). Moreover and contrary to the findings of Thornton (2009) obtained from a panel data study, central and subcentral balances are not significantly correlated in the cross-country sample analyzed in this paper.…”

“…Fiscal rules are therefore helpful in unitary countries where subnational governments lack, on average, the disciplinary effect of a substantial degree of tax autonomy. Thornton and Mati (2008) and Thornton (2009) use a panel regression analysis for 17 OECD countries over the period 1970-2001 and investigate the relationship between fiscal balances in central and subnational tiers of government, the latter at an aggregated level. They find that fiscal balances are, on average, positively correlated over time.…”

Tax Decentralization and Public Deficits in OECD Countries

“…However, once a measure based on sub-national revenues is used, decentralization seems to decrease central government deficits. Thornton and Mati (2008) examine whether fiscal decentralization impedes a coordinated national fiscal policy in OECD countries. They find that changes in the fiscal balances of federal and sub-national governments tend to be strongly correlated, and conclude on the basis of this evidence that decentralization does not complicate fiscal stabilization policies.…”

The Economics of public health care reform in advanced and emerging economies

“…Thornton and Mati (2008) also emphasize the role of institutional arrangements, such as administrative controls and fiscal rules, in ensuring good performance under decentralization. Recent work on decentralization and health spending underscores the detrimental effect of soft budget constraints(Crivelli, Leive, and Stratmann, 2010).©International Monetary Fund.…”