Sub-national deficits in European countries: The impact of fiscal rules and tax autonomy

Dirk Foremny

European Journal of Political Economy, 2014, vol. 34, issue C, 86-110

Abstract: This paper empirically examines how fiscal rules and tax autonomy influence deficits of sub-national sectors across European countries. I use a new panel-data set to measure tax autonomy and the stringency of fiscal rules for EU15 regional and local government sectors over the period 1995 to 2008. I apply an instrumental variables approach to obtain an unbiased estimate of the impact of fiscal rules on deficits. I use political variables describing the central governments characteristics as instruments for fiscal rules at the sub-national level. The results show that the effectiveness of fiscal rules and tax autonomy depends on the constitutional structure. Fiscal rules decrease deficits only in unitary countries. Deficits of sub-national sectors in federations can be avoided through tax autonomy.

Keywords: Sub-national deficits; Fiscal rules; Soft budget constraints; Fiscal federalism (search for similar items in EconPapers)
JEL-codes: E61 H71 H74 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (82)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:34:y:2014:i:c:p:86-110

DOI: 10.1016/j.ejpoleco.2014.01.003

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