How does fiscal decentralization affect aggregate, national, and subnational government size?

Abstract

Beyond conducting the usual regression analysis of the relationship between fiscal decentralization and aggregate government size (national and subnational combined), this paper makes the first attempt to examine how different fiscal decentralization measures affect the sizes of national and subnational (state and local combined) governments. An econometric analysis using panel data from 32 industrial and developing countries, 1980-1994, finds that (1) expenditure decentralization leads to smaller national governments, larger subnational governments, and larger aggregate governments; (2) revenue decentralization increases subnational governments by less than it reduces national governments, hence leads to smaller aggregate governments; and (3) vertical imbalance tends to increase the sizes of subnational, national, and aggregate governments.

Determinants of government size: evidence from China

“…4) Fiscal decentralization is measured by three indicators: expenditure decentralization (SONE), revenue decentralization (SONR), and vertical imbalance (VER_IMB). Following Marlow (1988) and Jin and Zou (2002), we employ the ratio of provincial budgetary expenditure to total budgetary expenditure as the measure of expenditure decentralization.…”

“…The ratio of local revenue to total government revenue evaluates the degree of revenue decentralization as proposed by Jin and Zou (2002). In literature, there are several ways of defining vertical imbalance.…”

“…Jin and Zou (2002) employ the share of central transfers in subnational expenditure, and Rodden (2002) proposes the share of central transfers in total subnational revenue as a proxy for vertical imbalance. In this paper, we adopt the method suggested by Jin and Zou (2002); thus, vertical imbalance is measured by the ratio of central transfers to subnational expenditure. The demand for public service is measured by the gross dependency ratio (GDR), the ratio of non-working population to working population aged 15 to 64 and the unemployment rate.…”

A Comprehensive Analysis of Expenditure Decentralization and of the Composition of Local Public Spending

“…There is a welldocumented mismatch between revenue and expenditure decentralization in most countries, in what has been labeled as vertical fiscal imbalance (Eyraud and Lusinyan 2013). This feature has been taken into account in recent studies on fiscal decentralization (e.g., Jin and Zou 2002;Rodden 2003;Fiva 2006;Gemmell et al 2013) where the distinction between decentralization of taxing powers and of spending powers is a key feature of most analyses. Not only we acknowledge this distinction, but we also take into account the role of grants besides that of decentralized revenues.…”

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

“…In a study with panel data on 32 industrial and developing countries, Jin and Zou (2002) reach more differentiated conclusions by disaggregating the general concept of fiscal decentralization into different "representations". That is, they recognize that fiscal decentralization could either pertain to the expenditure or the revenue side of the budget, and that the effects might vary according to the side of the budget that is considered.…”