Fiscal Decentralisation and Economic Growth in the OECD

Philip Bodman () and Kathryn Ford

No 706, MRG Discussion Paper Series from School of Economics, University of Queensland, Australia

Abstract: What impact, if any, does fiscal decentralisation have on economic growth? Further investigations of the inter-relationships between fiscal decentralisation and economic growth are timely given that government decentralisation remains at the forefront of many OECD policy agendas. The study incorporates new measures of fiscal decentralisation to better account for the impact of different levels of subnational fiscal autonomy on economic growth. The analysis also considers the impact of previously omitted public sector decentralisation variables that provide further indication of the extent to which subnational governments are ‘closer to the people’ and potentially better able to account for local preferences in fiscal decision-making. Whilst little evidence of a direct relationship between fiscal decentralisation and output growth is found, some evidence is found to support the hypothesis that a medium degree of fiscal decentralisation is positively related to growth in the capital stock and the level of human capital.

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