Are Fiscal Adjustments Less Successful in Decentralized Governments?

31 Pages Posted: 28 Mar 2007

See all articles by Christoph A. Schaltegger

Christoph A. Schaltegger

University of St. Gallen - CREMA

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 2007

Abstract

A common political claim is that decentralized governments undermine policy makers' ability to fight fiscal imbalance. This paper examines how different fiscal institutions influence the likelihood of a successful fiscal adjustment. Using a panel of the Swiss cantons from 1981 to 2001, we first analyze the episodes of tight fiscal policy and their macroeconomic consequences. Then, we empirically investigate the determinants of successful long-lasting deficit reductions. Contrary to the popular claim, we find that fiscal decentralization increases the probability of a successful fiscal consolidation. In addition, the results point to an important role of intergovernmental grants and of the circumstances, in particular the size of fiscal imbalance in the years before the consolidation, in determining a successful adjustment policy. Furthermore, coalition governments and large parliaments are less likely to implement successful fiscal stabilizations. Finally, there is some weak evidence that spending cuts are more promising in reaching a long-lasting fiscal adjustment than revenue increases.

Keywords: fiscal adjustment, consolidation policy, fiscal decentralization, fiscal institutions

JEL Classification: E61, E63, H61

Suggested Citation

Schaltegger, Christoph A. and Feld, Lars P., Are Fiscal Adjustments Less Successful in Decentralized Governments? (March 2007). CESifo Working Paper Series No. 1946. Available at SSRN: https://ssrn.com/abstract=976585

Christoph A. Schaltegger

University of St. Gallen - CREMA ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Lars P. Feld (Contact Author)

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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