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Fiscal Consolidation Across Government Levels - Part 3. Intergovernmental Grants, Pro- or Counter-cyclical?

  • Hansjörg Blöchliger
  • Balázs Égert

This paper provides empirical analysis that measures the cyclical properties of intergovernmental transfers (or grants). Modelling a fiscal policy reaction function this paper tests whether the transfers systems in OECD countries are pro- or counter-cyclical, i.e. whether they offset cyclical fluctuations of sub-central economies or, on the contrary, exacerbate them. Regression results suggest that transfer systems tend to be pro-cyclical in general and in more than half of OECD countries they tend to destabilise sub-central budgets. Transfer pro-cyclicality may be the result of several factors: Transfer spending is often determined as a share of central government tax revenue, which itself tends to fluctuate with the cycle. Moreover, many grants are matching sub-central spending and hence tend to exacerbate fluctuations of that sub-central spending. Pro-cyclical grants could partly explain the often observed pro-cyclicality of subcentral government fiscal policy. Assainissement budgétaire aux différents niveaux d'administration - Partie 3. Les dons interadministrations ont-ils un effet pro ou anticyclique ? Ce document présente une analyse empirique qui évalue les propriétés cycliques des transferts (ou dons) interadministrations. En modélisant une fonction de réaction de la politique budgétaire, ce document détermine si les systèmes de transfert dans les pays de l’OCDE sont pro ou anticycliques, c’est-à-dire s’ils compensent les variations cycliques des économies infranationales ou, au contraire, les amplifient. Les résultats des régressions suggèrent que les systèmes de transferts sont procycliques en général et dans plus de la moitié des pays de l’OCDE, et ont tendance à déstabiliser les budgets des administrations infranationales. La procyclicité des transferts peut être la conséquence de plusieurs facteurs : les dépenses de transfert représentent souvent un pourcentage des recettes fiscales de l’administration centrale, qui elles-mêmes fluctuent en fonction du cycle. En outre, de nombreux dons sont proportionnels aux dépenses infranationales et ont donc tendance à amplifier les fluctuations de ces dépenses infranationales. Le caractère procyclique des dons pourrait expliquer en partie la procyclicité souvent observée de la politique budgétaire des administrations infranationales.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 1072.

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Date of creation: 28 Jun 2013
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Handle: RePEc:oec:ecoaaa:1072-en
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