Partial Fiscal Decentralization and Sub-National Government Fiscal Discipline: Empirical Evidence from OECD Countries
27 Pages Posted: 13 Apr 2015
Date Written: March 31, 2015
Recent theoretical research suggests that financing sub-national governments’ expenditure out of own revenue sources is linked to more responsible budgeting, because the financial implications of spending decisions then are internalized within a jurisdiction. We test this proposition empirically on a sample of 23 OECD countries over the 1975-2000 period, and find evidence in line with the hypothesis that greater revenue decentralization (measured as sub-national governments’ share of own source tax revenues in general government tax revenue) is associated with improved sub-national government budget deficits/surpluses. This finding is cross-validated with a novel, independent dataset consisting of all 34 OECD member states from 2002 to 2008.
Keywords: fiscal federalism, revenue autonomy, budget deficits
JEL Classification: H620, H710, H770, E610
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