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Fiscal Decentralisation and Fiscal Outcomes

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  • Matteo Governatori
  • David Yim

Abstract

In recent years, the concern that the behaviour of subnational governments may hinder the achievement of national budgetary targets has been increasingly raised across the EU. In this paper the relationship between fiscal decentralisation and budgetary outcomes of the general government is analysed. Results suggest that fiscal decentralisation is not harmful per se for budgetary discipline, although it is likely to have an adverse effect if predominantly financed by transfers from the central government rather than by subnational taxes and fees. Moreover, borrowing rules applying to subnational governments appear to partly counteract the adverse effect of transfers on fiscal balances. Therefore, policy concerns should not focus on decentralisation as such but rather on a 'bad' design of decentralisation, i.e. one which is not accompanied by subnational financial responsibility.

Suggested Citation

  • Matteo Governatori & David Yim, 2012. "Fiscal Decentralisation and Fiscal Outcomes," European Economy - Economic Papers 2008 - 2015 468, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0468
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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