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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. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
    2. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, vol. 74(1), pages 97-139, October.
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    4. Jing Jin & Heng-fu Zou, 2000. "How does fiscal decentralization affect aggregate, national, and subnational government size?," CEMA Working Papers 72, China Economics and Management Academy, Central University of Finance and Economics.
    5. Jorn Rattso, 1999. "Aggregate local public sector investment and shocks: Norway 1946 - 1990," Applied Economics, Taylor & Francis Journals, vol. 31(5), pages 577-584.
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    9. Francesca Fornasari & Steven B. Webb & Heng-fu Zou, 1999. "The Macroeconomic Impact of Decentralized Spending and Deficits: International Evidence," CEMA Working Papers 28, China Economics and Management Academy, Central University of Finance and Economics, revised Oct 2000.
    10. 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.
    11. Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, vol. 89(7), pages 1157-1189, July.
    12. Bruno, Giovanni S.F., 2005. "Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models," Economics Letters, Elsevier, vol. 87(3), pages 361-366, June.
    13. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
    14. Robert P. Inman, 2008. "The Flypaper Effect," NBER Working Papers 14579, National Bureau of Economic Research, Inc.
    15. B Dafflon, 1992. "The assignment of functions to decentralized government: from theory to practice," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 10(3), pages 283-298, June.
    16. Rodden, Jonathan, 2003. "Reviving Leviathan: Fiscal Federalism and the Growth of Government," International Organization, Cambridge University Press, vol. 57(04), pages 695-729, September.
    17. Cerniglia, Floriana, 2003. "Decentralization in the public sector: quantitative aspects in federal and unitary countries," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 749-776, November.
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