Fiscal decentralization and deficits: International evidence

Abstract

This paper investigates macroeconomic effects of fiscal decentralization, which has been a neglected area of research. Panel evidence for 16 countries over 1980-1998 indicates that expenditure and revenue decentralization reduce budget deficits. A principal finding is that the fiscal disciplining effect of fiscal decentralization increases with population size. Interestingly, absence of local elections is associated with greater effectiveness of fiscal decentralization. The benefits of expenditure decentralization decrease with ethnolinguistic fractionalization and quality of governance.

Fiscal decentralization, ideology, and the size of the public sector

“…However, this literature, too, is inconclusive. For example, while Neyapti (2010) finds that fiscal decentralization reduces deficits, De Mello (2000) reaches the opposite conclusion.…”

Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?

“…In a review of the second generation models of fiscal federalism, Weingast (2009) asserts that "subnational governments that raise a substantial portion of their own revenue tend to be more accountable to citizens, to provide market-enhancing public goods, and to be less corrupt" (p. 283). We also find a paper by Neyapti (2010) that is related to our analysis. Her study shows that both expenditure and revenue decentralization reduce budget deficits for a sample of developing and developed countries over the period 1980-98.…”

Forecast of Total Staff Expense and Social Costs Starting From the Revenues of Fundeb and Sus: A Study in Paraíba’s Municipal Districts

“…Porém, pesquisas recentes (SHAH, 2006a;NEYAPTI, 2010NEYAPTI, , 2013 apontam para um caminho inverso. Neyapti (2010), após estudar 16 países entre 1980 e 2000, encontrou uma relação negativa significativa entre descentralização e déficits orçamentários.…”

“…Pesquisas recentes (SHAH, 2006a;NEYAPTI, 2010NEYAPTI, , 2013) avaliaram a eficácia da descentralização sob a ótica da responsabilidade fiscal. As evidências apontam que a descentralização é capaz de aumentar a eficiência fiscal, desde que as unidades se submetam às regras fiscais claras e aperfeiçoem os procedimentos de execução dessas normas.…”