Agnese Sacchi

The Impact of Fiscal Decentralization: A Survey

In this paper we offer a comprehensive and updated review of the impact of fiscal decentralization on the economy, society and politics. We start with the examination of two crucial and yet unsolved issues in the literature on decentralization: its proper measurement and the potential endogeneity of fiscal decentralization with many of the variables of interest we are trying to investigate. Then we discuss the main findings in the existing literature on the effects of decentralization on a relevant list of socio-economic variables. The impact of fiscal decentralization reforms on political institutions is also considered. Complete answers to the many questions on the impact of fiscal decentralization are not likely to be certain but overall there are reasons to be optimistic about the overall positive impact of the decentralized systems that have been introduced all over the world in the past several decades. The survey offered in this paper by necessity has to be selective but it presents a balanced view of what is known and what is not yet known opening room for further research and practice on fiscal decentralization.

A Comprehensive Analysis of Expenditure Decentralization and of the Composition of Local Public Spending

Sacchi A. and Salotti S. A comprehensive analysis of expenditure decentralization and of the composition of local public spending, Regional Studies. Many industrialized countries have recently implemented fiscal decentralization reforms assigning more spending responsibility to sub-national governments. This paper investigates the causes of the decentralization of different categories of public expenditure in 19 developed countries over the period 1980–2006. Different models for each of the spending functions under analysis are estimated adopting a general-to-specific empirical approach. Results confirm existing findings on the negative link between regional income disparities and expenditure decentralization. A similarly negative relationship is found for a set of demographic variables, leading to the conclusion that macroeconomic and, more importantly, political factors are responsible for the recent increase in decentralization. Finally, the analysis is completed by a study of the factors driving sub-national expenditure composition, with political and demographic changes emerging as the most important determinants.

The Effects of Fiscal Decentralization on Household Income Inequality: Some Empirical Evidence

Abstract We investigate the effects of fiscal decentralization on income inequality using a sample of 23 OECD countries over the period 1971–2000. We utilize novel and robust measures of fiscal decentralization based on different degrees of fiscal autonomy of sub-central governments. Our results highlight the importance of both the nature of fiscal decentralization—expenditure versus revenue—and the extent to which independent spending responsibility and taxing powers are actually assigned to local governments. A higher degree of tax decentralization is associated with higher household income inequality within a country. Thus, even if fiscal decentralization could be attractive according to efficiency reasons, it may actually have undesirable consequences on the income distribution.

How Regional Inequality Affects Fiscal Decentralisation: Accounting for the Autonomy of Subcentral Governments

The aim of this paper is to analyse the influence of regional economic disparities on the fiscal decentralisation processes in twenty-one OECD countries over the period 1981 to 2005. We use novel and robust measures of fiscal decentralisation based on different degrees of autonomy over both expenditures and taxes granted to subcentral governments. Our results show that high regional economic disparities call for lower fiscal decentralisation. This could be interpreted as the outcome of a bargaining process driven by the relative strength and different incentives of rich and poor regions. Moreover, the extent to which responsibility and decision powers are really left to subcentral governments appears to be crucial. Thus, from a positive point of view, equity considerations seem to suggest avoidance of fiscal decentralisation processes in countries with significant regional economic disparities, notwithstanding the well-known efficiency gains.

THE IMPACT OF FISCAL DECENTRALIZATION: A SURVEY: THE IMPACT OF FISCAL DECENTRALIZATION

In this paper, we offer a comprehensive and updated review of the impact of fiscal decentralization on the economy, society and politics. Our first target is the examination of two crucial and yet unsolved issues in the empirical literature on decentralization: the proper measurement of decentralization itself and its potential endogeneity in econometric estimates. Then, we discuss the main existing findings on the effects of decentralization on a relevant list of socio‐economic issues. The impact of fiscal decentralization reforms on political institutions and public policies is also considered. Complete answers on the impact of fiscal decentralization are not likely to be certain but, overall, there are reasons to be optimistic about the net positive result. Our survey by necessity has to be selective but it presents a balanced view of what is known and what is not yet known opening room for further research and practice on fiscal decentralization.

A comprehensive analysis of expenditure decentralization and of the composition of local public spending

Many countries have recently implemented fiscal decentralization reforms, assigning more functions and spending responsibilities to sub-national governments. In this paper we investigate the reasons behind the decentralization process of different categories of government expenditure (such as health, education, social security and welfare, housing, transports, public order) using IMF and OECD data for 21 developed countries over the period 1972-2006. We pay particular attention to the roles played by the taxing power of sub-national governments and by grants received from upper tiers of government. Then, we also study the determinants of the composition of local expenditure. Using a general-to-specific empirical approach, we adopt different models for each of the spending functions under analysis. This leads to a number of results, not yet reached in the existing literature, on the importance of tax decentralization, demographics, politics, and a number of other socio-economic variables.

The influence of decentralized taxes and intergovernmental grants on local spending volatility

ABSTRACT The influence of decentralized taxes and intergovernmental grants on local spending volatility. Regional Studies. This paper studies what affects the volatility of sub-central public spending in 20 Organisation for Economic Co-operation and Development (OECD) countries. The evidence based on data from 1972 to 2007 shows that the volatility of intergovernmental grants from upper levels is positively associated with the volatility of local expenditure. On the other hand, the volatility of local tax revenues – mainly that of property taxes – exerts the opposite effect. These findings suggest that making local governments rely more on grants than own tax revenues adversely affects their spending stability. Allowing them to levy autonomously taxes relying on responsive tax bases provides incentives to smooth their expenditure.

Fiscal Decentralization and Economic Growth Reconsidered: The Role of the Institutional Setting

Most of the empirical analysis explores the relationship between fiscal decentralization and economic growth within a constitutional void. This paper investigates the connection between fiscal decentralization and income growth across different institutional settings in 20 OECD countries over the period 1973-2007. We find that the pro-growth effects of tax decentralization depend critically on the nature of the administrative institutions and political system in place: fiscal decentralization leads to higher (lower) rates of economic growth when coupled with high (low) administrative and high (low) political decentralization. This provides evidence of institutional complementarities at work, as well as new insights on how local tax structures should be designed and combined with administrative and political settings to support economic growth.

The effects of fiscal decentralization on household income inequality: some empirical evidence

In this paper we investigate the effects of fiscal decentralization on income inequality using a sample of 23 OECD countries over the period 1971-2000. We utilize novel and robust measures of fiscal decentralization based on different degrees of expenditure and tax autonomy of sub-central governments. Our results highlight the importance of both the nature of fiscal decentralization - expenditure versus taxation - and the extent to which responsibility and decision powers are actually assigned to local governments. A higher degree of tax decentralization is associated with higher household income inequality within a country. This suggests that even if fiscal decentralization could be attractive according to efficiency reasons, it may actually have undesirable consequences on the equity side.

Who Honor the Rules of Federalism? Party System Nationalization and Fiscal Performance

This paper explores the impact of decentralization on countries’ fiscal outcomes paying attention to one aspect usually neglected in the literature: the relevance of self-interested local politics. Relevance that can be proxied by the nationalization of political party systems, namely the extent to which parties compete nationally oriented. Based on a sample of developed and developing countries over the period 1970-2011, our findings are twofold. First, fiscal decentralization has a positive effect on general governments primary balance. Second, primary balance is negatively affected by the nationalization of party systems only when the latter is extremely weak.