Grants versus Tax Sharing: The Extent of Central Government Control

Throughout the Organization for Economic Cooperation and Development (OECD), the regional and local governments typically rely heavily upon transfers from their national governments to finance their day-to-day expenditures. While grants remain the most popular method of transferring resources from the centre to the sub-centre, the potential for greater use of tax sharing agreements has received considerable attention in recent years. A key aspect of this debate and the fiscal decentralization literature, is the attempt to strike a balance between the sub-central government freedom and accountability on one hand, and macroeconomic stability on the other. This paper assesses the relative ability of the centre to control the national fiscal policy in an effort to rebalance the budget during periods of fiscal crisis. We compare and contrast the resources available to central governments when faced with a need to consolidate across various decentralization regimes, demonstrating that, contrary to established thinking, grants and tax sharing imply two very different levels of central authority.