## Preventing Fiscal Crises under Decentralization: Intergovernmental Policies and Institutions

_IMF Working Papers, May 9, 2025_

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**Canonical URL:** [Preventing Fiscal Crises under Decentralization: Intergovernmental Policies and Institutions](https://www.imf.org/en/publications/wp/issues/2025/05/09/preventing-fiscal-crises-under-decentralization-intergovernmental-policies-and-institutions-566291)

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## Bibliographic details
- Authors: Ryota Nakatani
- Published: May 9, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229009089.001

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### Overview
- Title: Preventing Fiscal Crises under Decentralization: Intergovernmental Policies and Institutions
- Author: Ryota Nakatani
- Date: May 9, 2025
- Research question: What instruments can governments deploy to prevent fiscal crises in decentralized fiscal systems?
- Core conclusion: Good public sector institutions, central controls over local fiscal balances and borrowing, and intergovernmental transfers can reduce the probability of a fiscal crisis under decentralization.

### Key findings
- Institutional quality
  - Strengthening good institutions mitigates the unwanted effects of devolution on fiscal unsustainability by inhibiting allocative inefficiencies caused by the moral hazard of governments.
- Expenditure decentralization
  - Expenditure decentralization to local governments increases the probability of a crisis only when local governments run large budget deficits.
  - This indicates that controls by the center over the local budget balance or borrowing ability may help to avoid overspending and the resulting excessive indebtedness.
- Controls and constraints
  - Subnational fiscal rules and administrative constraints reduce the probability of a crisis.
- Intergovernmental transfers
  - Intergovernmental transfers are associated with a lower probability of a fiscal crisis because they can play a role in interregional risk sharing among subnational governments.

### Policy implications and recommended instruments
- Strengthen public sector institutions to reduce moral hazard and allocative inefficiencies under devolution.
- Implement central government controls over local fiscal balances or borrowing ability to limit the risk that expenditure decentralization produces large local deficits.
- Adopt subnational fiscal rules and administrative constraints to lower crisis probability.
- Design intergovernmental transfer systems to enhance interregional risk sharing among subnational governments and thereby reduce systemic fiscal vulnerability.

### Subjects and keywords
- Subject: Expenditure; Fiscal federalism; Fiscal policy; Government asset and liability management; Government debt management; Public financial management (PFM); Revenue administration
- Keywords: Administrative Constraints; borrowing ability; Corruption; Decentralization; expenditure decentralization; Fiscal Crisis; Fiscal federalism; Global; Government asset and liability management; Government debt management; Intergovernmental Transfers; probability of a crisis; revenue decentralization; Spending decentralization; Subnational Fiscal Rules

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_Source: https://www.imf.org/en/publications/wp/issues/2025/05/09/preventing-fiscal-crises-under-decentralization-intergovernmental-policies-and-institutions-566291_