Are Fiscal Adjustments Less Successful in Decentralized Governments?

By Christoph A. Schaltegger, Lars P. Feld. Social Science Research Network, 2009

130 citations recorded by the source corpus.

A common political claim is that decentralized governments undermine policy-makers' ability to resist fiscal imbalance. This paper examines how fiscal centralization influences the likelihood of a successful fiscal adjustment. Using a panel of Swiss cantons from 1981 to 2001, we empirically investigate the determinants of successful long-lasting deficit reductions. Contrary to some results in the literature, we find that fiscal centralization significantly decreases the probability of a successful fiscal consolidation when the contravening effects of competitive and cooperative federalism are disentangled. The results also point to an important role of the economic environment, in particular the size of the primary balance in the years before the consolidation, in determining whether adjustment policy is successful.

Subfields: Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/c6102183fe117d67870314995b4e14cdbc3cdc74

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Citations in the corpus

FISCAL DECENTRALIZATION AND ECONOMIC GROWTH: SPENDING VERSUS REVENUE DECENTRALIZATION (2013, background): “Finally, Schaltegger and Feld (2008) show that, contrary to the popular claim that decentralized governments undermine policy makers‟ ability to fight fiscal imbalance, FD increases the probability of a successful „fiscal consolidation‟ (lower public debt).”
On the link between fiscal decentralization and public debt in OECD countries (2010, background): “Further studies on this and related questions are Stein (1998), who observes that decentralization expands the public sector’s size but not the deficit of the total government sector in Latin America; Rodden (2002) who controls in some models for the degree of revenue and expenditure decentralizatio”