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Decentralizing Spending More Than Revenue

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Author Info

  • Luc Eyraud
  • Lusine Lusinyan

Abstract

In many countries the decentralization of spending responsibilities has outpaced the decentralization of revenue powers. Sub-national governments have then to rely on transfers from the center and borrowing to finance their spending. When this occurs, we find that the overall fiscal deficit tends to increase. This result is based on cross-country econometric evidence from OECD countries, and is particularly strong in the presence of regional disparities. Fiscal discipline can be strengthened by ensuring that sub-national taxing powers are adequate to meet spending obligations.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/226.

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Length: 33
Date of creation: 01 Sep 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/226

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Keywords: OECD; Economic models; Fiscal reforms; Governance; Government expenditures; Revenues; decentralization; fiscal performance; sub-national governments; vertical fiscal imbalance; fiscal imbalance; fiscal decentralization; fiscal federalism; intergovernmental transfers; sub-national borrowing; federalism; expenditure decentralization; fiscal imbalances; government expenditure; fiscal balance; government spending; intergovernmental fiscal; vertical fiscal imbalances; fiscal autonomy; fiscal discipline; budget constraint; fiscal relations; general government expenditure; sub-national authorities; decentralizations; fiscal transfers; budget constraints; taxation; sub-national government; intergovernmental fiscal transfers; tax effort; primary expenditure; fiscal policy; intergovernmental fiscal relations; fiscal outcomes; tax sharing; central government spending; tax bases; tax administration; fiscal gap; government deficit; subnational government; fiscal deficits; government revenue; fiscal deficit; fiscal rules; fiscal equalization; tax revenues; sub-national revenues; decentralization of revenue; public spending; debt service; fiscal balances; fiscal consolidations; tax base; horizontal fiscal imbalances; fiscal affairs; fiscal affairs department; decentralization variables; revenue autonomy; fiscal policies; fiscal position; decentralization reforms; decentralization theorem; public debt; fiscal studies; fiscal data; sub-national expenditures; local taxes; tax autonomy; subnational taxes; autonomy of sub-national governments; fiscal decentralization reforms; local expenditure; subnational tax; fiscal arrangements; tax burden; sub-national finances; fiscal pressure; sub-national entities;

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References

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  1. Luiz de Mello, 2007. "Local Government Finances: The Link between Intergovernmental Transfers and Net Worth," OECD Economics Department Working Papers 581, OECD Publishing.
  2. Alexander Plekhanov & Raju Jan Singh, 2005. "How Should Subnational Government Borrowing Be Regulated? Some Cross-Country Empirical Evidence," IMF Working Papers 05/54, International Monetary Fund.
  3. Beck, T.H.L. & Clarke, G. & Groff, A. & Keefer , P. & Walsh, P., 2001. "New tools in comparative political economy: The database of political institutions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125517, Tilburg University.
  4. Ernesto Crivelli & Adam Leive & Thomas Stratmann, 2010. "Subnational Health Spending and Soft Budget Constraints in OECD Countries," IMF Working Papers 10/147, International Monetary Fund.
  5. Charles E. McLure, Jr. & Jorge Martinez-Vazquez, 1998. "Intergovernmental Fiscal Relations in Vietnam," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper9802, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Roy Bahl & Jorge Martinez-Vazquez, 2013. "Sequencing Fiscal Decentralization," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 641-687, November.
  7. Roy Bahl & Sally Wallace, 2004. "Intergovernmental Transfers: The Vertical Sharing Dimension," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0419, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  8. de Mello, Luiz Jr, 2000. "Fiscal Decentralization and Intergovernmental Fiscal Relations: A Cross-Country Analysis," World Development, Elsevier, vol. 28(2), pages 365-380, February.
  9. Baskaran, Thushyanthan, 2010. "On the Link Between Fiscal Decentralization and Public Debt in OECD Countries," MPRA Paper 21599, University Library of Munich, Germany.
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Cited by:
  1. Massimo Bordignon & Matteo Gamalerio & Gilberto Turati, 2013. "Decentralization, Vertical Fiscal Imbalance, and Political Selection," DISCE - Working Papers del Dipartimento di Economia e Finanza def2, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  2. Jens Dietrichson & Lina Maria Ellegård, 2013. "Assist or desist? Conditional bailouts and fiscal discipline in local governments," ERSA conference papers ersa13p598, European Regional Science Association.
  3. Izabela Karpowicz, 2012. "Narrowing Vertical Fiscal Imbalances in Four European Countries," IMF Working Papers 12/91, International Monetary Fund.
  4. Sergio Beraldo & Massimiliano Piacenza & Gilberto Turati, 2012. "Fiscal Decentralization In Weak Institutional Environments," Post-Print halshs-00706970, HAL.
  5. Fardoust, Shahrokh & Lin, Justin Yifu & Luo, Xubei, 2012. "Demystifying China's fiscal stimulus," Policy Research Working Paper Series 6221, The World Bank.

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