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Fiscal equalisation schemes and sub-central government borrowing

  • Diego Martínez López


    (Dpto. Economía, Mét. Cuantitativos e H.ª Econ.)

  • Salvador Barrios

    (IPTS - Instituto de Prospectiva Tecnológica)

This paper analyses the role played by the fiscal equalisation scheme in determining sub-national public borrowing in decentralised countries. We show theoretically how the regional income redistribution modifies the intertemporal budget constraint of the regions and discuss the conditions under which the federal equalisation arrangements are likely to lead to diverging borrowing between rich and poor regions. We test empirically the link between regional government primary balances and the level of GDP per capita in Canada, Germany and Spain. Our econometric analysis shows that this relationship can be either positive (as in the German case) or negative (as in the Canadian and Spanish cases), thus suggesting that either poor or rich regions can display higher regional public borrowing on average. We attribute these results to the differences in the design of the fiscal equalisation schemes and illustrate this through numerical simulations of our model. These results suggest that reforms of the federal financing schemes can prove instrumental in reducing regional heterogeneity in public borrowing. Este artículo analiza el papel jugado por el sistema de nivelación fiscal a la hora de determinar el endeudamiento de gobiernos subcentrales, Mostramos teóricamente cómo la redistribución territorial de la renta modifica la restricción presupuestaria intertemporal de las regiones y discutimos las condiciones bajo las que los sistemas de nivelación fiscal pueden conducir a niveles de endeudamiento distintos en las regiones ricas y pobres. Comprobamos empíricamente los vínculos entre el superávit primario regional y la renta per cápita en Canadá, Alemania y España. Nuestro análisis econométrico muestra que esta relación puede ser positiva (Alemania) o negativa (Canadá y España), sugiriendo por tanto que tanto las ricas como las pobres pueden llegar a niveles de endeudamiento superiores. Atribuimos este resultado a las diferencias en el diseño de los modelos de nivelación fiscal y lo ilustramos con simulaciones numéricas. Estos hallazgos sugieren que las reformas en los modelos de financiación territorial tienen efectos sobre la heterogeneidad en los comportamientos de gobiernos regionales a la hora de endeudarse.

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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie EC with number 2013-03.

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Length: 42 pages
Date of creation: Apr 2013
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasec:2013-03
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