Too Small to Fail? Subnational Spending Pressures in Europe

Author/Editor: Luc Eyraud ; Marialuz Moreno Badia
Publication Date: February 25, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: The purpose of this paper is to assess whether expenditure decentralization has contributed to weakening fiscal performance in Europe. Using a panel of EU15 countries for the period 1995-2011, we estimate three econometric models and ask the following questions: (1) does the form of spending decentralization affect the general government fiscal balance?; (2) is there evidence of spending duplication?; and (3) are soft budget constraints prevalent at the subnational level in Europe? Our results indicate that current decentralization models may have some shortcomings and efforts to achieve fiscal consolidation would require improvements in three areas: better matching subnational spending and revenues; reshaping some expenditure assignments to reduce overlap; and improving the effectiveness of institutional arrangements at the subnational level.
Series: Working Paper No. 13/46
Subject(s): Government expenditures | Europe | Fiscal consolidation | Economic models | Cross country analysis

Publication Date: February 25, 2013
ISBN/ISSN: 9781475578157/1018-5941 Format: Paper
Stock No: WPIEA2013046 Pages: 36
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