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Fiscal consolidation and decentralisation: a tale of two tiers

  • Julia Darby
  • V. Anton Muscatelli
  • Graeme Roy

This paper contributes to the established literature on fiscal consolidations by investigating the distinct behaviour of central and sub-central tiers of government during general government consolidation attempts. In the light of different degrees of decentralisation across OECD countries, and the different responsibilities devolved to sub-central tiers, we believe that this approach offers an illuminating insight into the analysis of fiscal consolidations and their success. We show that the involvement of the sub-central tiers of government is crucial to achieving cuts in expenditure, particularly in relation to the overall size of the government wage bill. In addition, central governments appear to exert a strong influence on the expenditure of sub-central tiers through their grant allocations, and control of these allocations appears to have a considerable impact upon the overall success of consolidation attempts. Finally, we demonstrate that there is a skewness in cuts towards sub-central capital expenditure both when central governments cut grant allocations and when sub-central governments engage in lone consolidation attempts.

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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 26 (2005)
Issue (Month): 2 (June)
Pages: 169-195

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Handle: RePEc:ifs:fistud:v:26:y:2005:i:2:p:169-195
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  1. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  2. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc.
  3. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  4. Bradley, John & Whelan, Karl, 1997. "The Irish expansionary fiscal contraction: A tale from one small European economy," Economic Modelling, Elsevier, vol. 14(2), pages 175-201, April.
  5. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  6. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  7. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries," CEPR Discussion Papers 2374, C.E.P.R. Discussion Papers.
  8. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
  9. Rudiger Dornbusch, 1988. "Credibility, Debt and Unemployment: Ireland's Failed Stabilization," NBER Working Papers 2785, National Bureau of Economic Research, Inc.
  10. Edward M. Gramlich, 1990. "Fiscal Indicators," OECD Economics Department Working Papers 80, OECD Publishing.
  11. Jürgen von Hagen & Andrew Hughes Hallett & Rolf Strauch, 2001. "Budgetary Consolidation in EMU," European Economy - Economic Papers 148, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  12. Hjelm, Göran & Johansson, Martin W, 2002. "Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland," Working Papers 2002:11, Lund University, Department of Economics.
  13. Heylen, Freddy & Everaert, Gerdie, 2000. " Success and Failure of Fiscal Consolidation in the OECD: A Multivariate Analysis," Public Choice, Springer, vol. 105(1-2), pages 103-24, October.
  14. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  15. Christophe Kamps, 2001. "Fiscal Consolidation in Europe: Pre- and Post-Maastricht," Kiel Working Papers 1028, Kiel Institute for the World Economy.
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