On Government Centralization and Budget Referendums: Evidence from Switzerland

Abstract

Previous theoretical and empirical research has shown that policymakers have an incentive to centralize government activities in order to weaken the competitive pressure of fiscal federalism. We propose and test a positive model of fiscal federalism in which centralization is less likely to occur where budget referendums are possible. The reason for this result is that budget referendums reduce the extent to which pro-centralization regions can commit to a low level of spending delegating the centralization choice to elected policymakers. In addition, it reduces the ability of higher level policy-makers to attract additional responsibilities in order to gain policy discretion. Empirical findings from a panel data analysis for Swiss cantons from 1980 to 1998 support this hypothesis.

Keywords: Centralization, Fiscal Federalism, Budget Referendums

JEL Classification: H1, H7, D72