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Fiscal Decentralisation and Fiscal Outcomes

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  • Matteo Governatori
  • David Yim
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    Abstract

    In recent years, the concern that the behaviour of subnational governments may hinder the achievement of national budgetary targets has been increasingly raised across the EU. In this paper the relationship between fiscal decentralisation and budgetary outcomes of the general government is analysed. Results suggest that fiscal decentralisation is not harmful per se for budgetary discipline, although it is likely to have an adverse effect if predominantly financed by transfers from the central government rather than by subnational taxes and fees. Moreover, borrowing rules applying to subnational governments appear to partly counteract the adverse effect of transfers on fiscal balances. Therefore, policy concerns should not focus on decentralisation as such but rather on a 'bad' design of decentralisation, i.e. one which is not accompanied by subnational financial responsibility.

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    File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2012/ecp468_en.htm
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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 468.

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    Length: 50 pages
    Date of creation: Nov 2012
    Date of revision:
    Handle: RePEc:euf:ecopap:0468

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