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Decentralization and intra-country transfers in the great recession: the case of EU

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  • Timothy J. Goodspeed

Abstract

The classic arguments of Musgrave (1959) and Oates (1972) are that the redistribution and stabilization functions should be assigned to the federal level of government. The argument is that redistribution is difficult to achieve at lower levels because the public good nature of redistribution and the mobility of individuals and firms. Likewise, stabilization is difficult to achieve because fiscal stimulus of lower levels of government is likely to be underused due to spillover effects and a limited ability to service debt obligations. These arguments suggest that under-provision of redistributive spending should accompany greater decentralization. They also suggest that subnational policies aimed at macroeconomic stabilization are likely to be less effective than national ones, an important issue in an economic crisis. In this paper I examine data on intra-country social protection transfers in the EU before and after the crisis. The results support the classic federalism assignment. For both reasons of redistribution and stabilization, social protection expenditures are best assigned to the central level of government. Regression results indicate that greater decentralization lowers social protection expenditures and a greater vertical fiscal imbalance and greater subnational deficits result in more spending on things other than social protection.

Suggested Citation

  • Timothy J. Goodspeed, 2018. "Decentralization and intra-country transfers in the great recession: the case of EU," Working Papers. Collection A: Public economics, governance and decentralization 1807, Universidade de Vigo, GEN - Governance and Economics research Network.
  • Handle: RePEc:gov:wpaper:1807
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    References listed on IDEAS

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    1. Santiago Lago-Peñas & Jorge Martinez-Vazquez & Agnese Sacchi, 2020. "Fiscal stability during the Great Recession: putting decentralization design to the test," Regional Studies, Taylor & Francis Journals, vol. 54(7), pages 919-930, July.
    2. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 409-421, August.
    3. Michael P. Devereux & Simon Loretz, 2013. "What Do We Know About Corporate Tax Competition?," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 745-774, September.
    4. Goodspeed, Timothy J., 1989. "A re-examination of the use of ability to pay taxes by local governments," Journal of Public Economics, Elsevier, vol. 38(3), pages 319-342, April.
    5. de Mello, Luiz Jr, 2000. "Fiscal Decentralization and Intergovernmental Fiscal Relations: A Cross-Country Analysis," World Development, Elsevier, vol. 28(2), pages 365-380, February.
    6. Eyraud, Luc & Lusinyan, Lusine, 2013. "Vertical fiscal imbalances and fiscal performance in advanced economies," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 571-587.
    7. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    decentralization; transfers; social protection; federalism.;
    All these keywords.

    JEL classification:

    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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