Public Debt Consolidation with Multi-Tier Governments: Rules Matter

Abstract

This paper investigates the relationship between fiscal decentralization and budgetary performance in a sample of 28 OECD countries over the period 1995-2008, characterized by a consolidation of their average debt ratio. Two empirical questions are addressed: first, did expenditure and revenue decentralization contribute to aggregate subnational discipline and did cooperative agreements between the central and subcentral layers of government have a positive impact on the budgetary performance of the latter? And second, did tax autonomy of regions and local governments guarantee fiscal discipline and to what extent did subnational fiscal rules contribute to this objective? The empirical analysis proceeds in two stages; the first stage concerns aggregate subnational fiscal balances, whereas disaggregated deficits at the regional and local level are investigated in the second stage.