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Fiscal decentralisation in times of financial crises

Listed author(s):
  • David Bartolini
  • Agnese Sacchi
  • Simone Salotti
  • Raffaella Santolini

The virtues of fiscal decentralisation are usually assessed against the provision of local public goods, little is said about its impact on public finances. There is, however, a growing concern that central governments losing control over part of the budget could negatively affect public finances, especially in times of adverse financial conditions. The present work shows that these concerns are misplaced. The empirical investigation on 19 OECD countries, over the period 1980-2010, shows that expenditure decentralisation improves the central budget balance without prejudice for local budgets, thus improving the overall country’s fiscal position. This effect is reinforced when combined with tax autonomy. During periods of financial crises, the disciplinary role of fiscal decentralisation appears to be even stronger, raising concerns about the recentralisation trend recently pursued by some advanced economies precisely to face fiscal distress and economic stagnation.

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File URL: http://infogen.webs.uvigo.es/WP/WP1506.pdf
File Function: First version, 2015
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Paper provided by Universidade de Vigo, GEN - Governance and Economics research Network in its series Working Papers. Collection A: Public economics, governance and decentralization with number 1506.

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Length: 24 pages
Date of creation: Jul 2015
Handle: RePEc:gov:wpaper:1506
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