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Too Small to Fail? Subnational Spending Pressures in Europe

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  • Luc Eyraud
  • Marialuz Moreno Badia
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    Abstract

    The purpose of this paper is to assess whether expenditure decentralization has contributed to weakening fiscal performance in Europe. Using a panel of EU15 countries for the period 1995-2011, we estimate three econometric models and ask the following questions: (1) does the form of spending decentralization affect the general government fiscal balance?; (2) is there evidence of spending duplication?; and (3) are soft budget constraints prevalent at the subnational level in Europe? Our results indicate that current decentralization models may have some shortcomings and efforts to achieve fiscal consolidation would require improvements in three areas: better matching subnational spending and revenues; reshaping some expenditure assignments to reduce overlap; and improving the effectiveness of institutional arrangements at the subnational level.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/46.

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    Length: 36
    Date of creation: 25 Feb 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/46

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    Related research

    Keywords: Government expenditures; Europe; Fiscal consolidation; Economic models; Cross country analysis; fiscal federalism; local governments; fiscal balance; decentralization; subnational governments; expenditure decentralization; fiscal decentralization; subnational expenditure; recentralization; decentralizations; decentralization models; fiscal deficits; decentralization variable; intergovernmental transfers; decentralization framework; budget constraints; fiscal performance; fiscal position; subnational deficit; tax competition; fiscal outcomes; decentralization reforms; government spending; public finances; sub-national governments; subnational units; tax base; revenue autonomy; subnational deficits; fiscal affairs department; government deficit; fiscal crisis; fiscal vulnerabilities; subnational jurisdictions; fiscal discipline; tax burden; decentralized government; subnational budgets; decentralization indicators; decentralization programs; fiscal stimulus; subnational tax; taxation; fiscal policy;

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    References

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    1. Luc Eyraud & Anita Tuladhar & Julio Escolano & Marialuz Moreno Badia & Juliane Sarnes, 2012. "Fiscal Performance, Institutional Design and Decentralization in European Union Countries," IMF Working Papers 12/45, International Monetary Fund.
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    3. Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, Elsevier, vol. 89(7), pages 1157-1189, July.
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    13. Charles E. McLure, Jr. & Jorge Martinez-Vazquez, 1998. "Intergovernmental Fiscal Relations in Vietnam," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper9802, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    14. Douglas Holtz-Eakin & Harvey S. Rosen, 1989. "Municipal Construction Spending: An Empirical Examination," NBER Working Papers 2989, National Bureau of Economic Research, Inc.
    15. Cerniglia, Floriana, 2003. "Decentralization in the public sector: quantitative aspects in federal and unitary countries," Journal of Policy Modeling, Elsevier, Elsevier, vol. 25(8), pages 749-776, November.
    16. Douglas Holtz-Eakin & Harvey S. Rosen, 1993. "Municipal Construction Spending: An Empirical Examination," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 5(1), pages 61-84, 03.
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    18. Jing Jin & Heng-fu Zou, 2000. "How does fiscal decentralization affect aggregate, national, and subnational government size?," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 72, China Economics and Management Academy, Central University of Finance and Economics.
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