How Regional Inequality Affects Fiscal Decentralisation: Accounting for the Autonomy of Subcentral Governments

Abstract

The aim of this paper is to analyse the infiuence of regional economic disparities on the fiscal decentralisation processes in twenty-one OECD countries over the period 1981 to 2005. We use novel and robust measures of fiscal decentralisation based on different degrees of autonomy over both expenditures and taxes granted to subcentral governments. Our results show that high regional economic disparities call for lower fiscal decentralisation. This could be interpreted as the outcome of a bargaining process driven by the relative strength and different incentives of rich and poor regions. Moreover, the extent to which responsibility and decision powers are really left to subcentral governments appears to be crucial. Thus, from a positive point of view, equity considerations seem to suggest avoidance of fiscal decentralisation processes in countries with significant regional economic disparities, notwithstanding the well-known efficiency gains.

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

“…More generally, fiscal decentralization might affect the fiscal stability of a country altering the major fiscal outcomes such as budget deficit (Neyapti 2010) and public indebtedness (Baskaran 2010). Another macroeconomic variable that may be affected by decentralization is regional disparity, although the causality should mainly run from the latter to the former, and not vice versa (see Sacchi and Salotti 2013).…”

“…Period dummies (ω t ) are included, and ε i,t is an error term. Sacchi and Salotti (2013). The intuition lies in the fact that higher levels of inequality across territories are likely to increase the demand for inter-regional redistribution that could be better satisfied by the central government's intervention (Wibbels 2005).…”

“…More recently the attention has shifted towards the investigation of additional variables capable of shaping decentralization such as regional inequality (e.g., Beramendi 2007;Stegarescu 2009;Sacchi and Salotti 2013). However, with all efforts concentrated on the determinants of fiscal decentralization as a whole, little has been said on what leads to decentralize specific government functions.…”

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

“…More generally, fiscal decentralization might affect the fiscal stability of a country altering the major fiscal outcomes such as budget deficit (Neyapti 2010) and public indebtedness (Baskaran 2010). Another macroeconomic variable that may be affected by decentralization is regional disparity, although the causality should mainly run from the latter to the former, and not vice versa (see Sacchi and Salotti 2013).…”

Horizontal Imbalances of Russian Federation Budget System

“…(2014), Vo, D. H. (2010). The international experience in finding solution to the problem of fiscal decentralisation is studied in the papers of Reayat, N., Ahmad, I., Khalil, J., Rahim, T. (2014), Bird, R. M., Smart, M. (2002), Sacchi, A., Salotti, S. (2014). The fiscal equalisation through dedicated financial funds is described by Kyriacou, A. P., Roca-Sagalés, O.…”