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Beyond the Centre: Tracing Decentralization’s Influence on Time-varying Fiscal Sustainability

Author

Listed:
  • António Afonso
  • José Alves
  • João Tovar Jalles
  • Sofia Monteiro

Abstract

This paper explores the nuanced relationship between fiscal decentralization and fiscal sustainability. Employing panel data analyses, it scrutinizes how decentralization influences fiscal discipline across different governmental levels. Results for 185 countries show that while tax decentralization often hampers the degree of fiscal responsiveness, potentially due to misaligned local and national objectives and loss of scale efficiency, spending decentralization can enhance fiscal outcomes by promoting efficient resource allocation. These findings are contextualized within a broad range of economic and political environments, highlighting that the impacts of decentralization are contingent upon local capacities and overarching governance frameworks. Hence, we contribute to the understanding of fiscal policies’ complexity in decentralized systems and offer significant policy insights for fiscal sustainability in varied administrative contexts.

Suggested Citation

  • António Afonso & José Alves & João Tovar Jalles & Sofia Monteiro, 2024. "Beyond the Centre: Tracing Decentralization’s Influence on Time-varying Fiscal Sustainability," CESifo Working Paper Series 11132, CESifo.
    • Handle: RePEc:ces:ceswps:_11132
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    Keywords

    panel data analysis; fiscal sustainability; decentralization; fiscal rules; political cycles; time-varying coefficients;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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