Fiscal decentralization and budgetary discipline: lessons for Spain from other countries’ experience

The aim of this paper is to analyse the effect of fiscal decentralization on subcentral governments’ budgetary discipline according to the evidence of case studies of ten countries that have significantly different institutional environments. Before analysing the case studies, we systematize the effect of the different characteristics of the fiscal institutional environment on the central government decision on whether (or not) to intervene assigning additional resources to the subcentral government when they issue debt, i.e. bailing them out. The experiences of these different countries show that fiscal decentralization can discipline the subcentral governments’ budgetary decisions, as it happens, for instance, in the USA, Canada and Hungary. However, there are no specific characteristics of the institutional environment that guarantees subcentral budgetary discipline. The absence of bailout in the past builds the reputation of the central government and it is a common characteristic in the three countries of the sample where subcentral governments have hard budget constraints.