Vertical Fiscal Imbalances and the Accumulation of Government Debt
IMF Working Papers, November 20, 2014
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Bibliographic details
- Authors: Iñaki Aldasoro, Mike Seiferling
- Published: November 20, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484357552.001
Summary
- Delegating fiscal decision making power to sub-national governments may lead to better and more efficient provision of public goods and services.
- Decentralization has often occurred on the expenditure and less on the revenue side, creating “vertical fiscal imbalances” where sub-national governments’ expenditures are not financed through their own revenues.
- The mismatch between own revenues and expenditures may have consequences for public finance performance.
- This study constructs a large sample of general and subnational level fiscal data beginning in 1980 from the IMF’s Government Finance Statistics Yearbook.
- Extending the literature to the balance sheet approach, this paper examines the effects of vertical fiscal imbalances on government debt.
- The results indicate that vertical fiscal imbalances are relevant in explaining government debt accumulation suggesting a degree of caution when promoting fiscal decentralization.
- The paper underlines the role of data covering the general government and its subsectors for comprehensive analysis of fiscal performance.
Methods and Data
- Data source: IMF’s Government Finance Statistics Yearbook (GFSY).
- Sample: Large sample of general and subnational level fiscal data beginning in 1980.
- Analytical extension: Application of the balance sheet approach to study effects of vertical fiscal imbalances on government debt.
Key Findings and Statistics
- Vertical fiscal imbalances are relevant in explaining government debt accumulation.
- The evidence suggests caution in promoting fiscal decentralization when imbalances persist.
- Emphasis on the importance of comprehensive data covering the general government and its subsectors for fiscal performance analysis.
Policy Implications and Recommendations
- Exercise caution when promoting fiscal decentralization, particularly where decentralization is concentrated on expenditures and not matched by sub-national revenue-raising capacity.
- Strengthen data collection and integration across general government and subnational subsectors to support comprehensive analysis of fiscal performance and debt dynamics.
- Consider the balance sheet approach in assessments of fiscal decentralization to capture implications for government debt accumulation.