Decentralizing Spending More Than Revenue: Does it Hurt Fiscal Performance?

September 1, 2011

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

In many countries the decentralization of spending responsibilities has outpaced the decentralization of revenue powers. Sub-national governments have then to rely on transfers from the center and borrowing to finance their spending. When this occurs, we find that the overall fiscal deficit tends to increase. This result is based on cross-country econometric evidence from OECD countries, and is particularly strong in the presence of regional disparities. Fiscal discipline can be strengthened by ensuring that sub-national taxing powers are adequate to meet spending obligations.

Subject: Expenditure, Fiscal policy, Fiscal stance, General government spending, Public debt, Public financial management (PFM)

Keywords: balance term, central government, country, fiscal balance, fiscal federalism, Fiscal stance, General government, General government spending, government, government balance, government expenditure, local governments, national government, OECD, OECD country, revenue, spending, vertical fiscal imbalance, vertical gap, VFI coefficient, WP

Pages:
33
Volume:
2011
DOI:
https://doi.org/10.5089/9781463904944.001
Issue:
226
Series:
Working Paper No. 2011/226
Stock No:
WPIEA2011226
ISBN:
9781463904944
ISSN:
1018-5941

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