Are Fiscal Adjustments less Successful in Decentralized Governments?

Christoph A. Schaltegger and Lars P. Feld ()

CREMA Working Paper Series from Center for Research in Economics, Management and the Arts (CREMA)

Abstract: A common political claim is that decentralized governments undermine policy makers’ ability to fight fiscal imbalance. This paper examines how different fiscal institutions influence the likeli-hood of a successful fiscal adjustment. Using a panel of the Swiss cantons from 1981 to 2001, we first analyze the episodes of tight fiscal policy and their macroeconomic consequences. Then, we empirically investigate the determinants of successful long-la¬sting deficit reductions. Contrary to the popular claim, we find that fiscal decentralization increases the probability of a successful fiscal consolidation. In addition, the results point to an important role of intergovernmental grants and the circumstances, in particular the size of fiscal imbalance in the years before the consolida-tion in determining a successful adjustment policy. Furthermore, coalition governments and large parliaments less likely implement successful fiscal stabilizations. Finally, there is some weak evidence that spending cuts are more promising in reaching a long-lasting fiscal adjustment than revenue increases.

Keywords: Fiscal Adjustment; Consolidation Policy; Fiscal Decentralization; Fiscal Institutions (search for similar items in EconPapers)
JEL-codes: E61 E63 H61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pol
Date: Written 2007-03

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Related works:
Working Paper: Are Fiscal Adjustments less Successful in Decentralized Governments? (2007)
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