How do Sub-Central Government react to cuts in grants received from Central Governments Evidence from a Panel of 15 OECD Countries

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How do Sub-Central Government react to cuts in grants received from Central Governments Evidence from a Panel of 15 OECD Countries

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Julia Darby
V. Anton Muscatelli
Graeme Roy

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Abstract

Cross-country evidence on sub-central governments’ responses to cuts in grants received from central government shows the typical response is to adjust expenditure rather than offset cuts by raising ‘own’ revenues. Spending cuts are focused on the wage bill and, disproportionately, on capital expenditure. Even where countries have greater flexibility to offset the centrally imposed cuts, through a high degree of expenditure decentralisation, tax and borrowing autonomy, they tend not to exercise these powers. So, centrally imposed cuts result in expenditure restraint at the sub-central level, but the adjustment appears to suffer from short-termism, given the disproportionate focus on capital spending.

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Paper provided by Department of Economics, University of Glasgow in its series Working Papers with number 2005_18.

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Date of revision: Jun 2005
Handle: RePEc:gla:glaewp:2005_18

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-12-01 (All new papers)
NEP-EEC-2005-12-01 (European Economics)
NEP-MAC-2005-12-01 (Macroeconomics)
NEP-PBE-2005-12-01 (Public Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Other versions:
- Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," NBER Working Papers 9219, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Rodden, Jonathan, 2003. "Reviving Leviathan: Fiscal Federalism and the Growth of Government," International Organization, Cambridge University Press, vol. 57(04), pages 695-729, November. [Downloadable!]

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Graeme Roy, 2006. "Grants Versus Tax Sharing: the Extent of Central Government Control," ERSA conference papers ersa06p74, European Regional Science Association. [Downloadable!]

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This page was last updated on 2009-11-30.

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