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

Luc Eyraud and Lusine Lusinyan

No 2011/226, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; government; vertical fiscal imbalance; spending; country; General government; government balance; revenue; fiscal federalism; vertical gap; local governments; fiscal balance; OECD; balance term; OECD country; government expenditure; central government; national government; VFI coefficient; Fiscal stance; General government spending (search for similar items in EconPapers)
Pages: 33
Date: 2011-09-01
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Citations: View citations in EconPapers (31)

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