Fiscal consolidation across levels of government

Abstract

This chapter deals with the consolidation of public finances across levels of government in the aftermath of the 2008-09 crisis. It reviews the pace of consolidation in response to widening deficits and rising debt, then assesses whether consolidation at the sub-central level has been achieved by spending cuts rather than an increase in own tax revenue and intergovernmental transfers. It analyses additional sub-central consolidation needs under various scenarios. Overall, sub-central governments’ finances are in fairly good shape in most OECD countries, but considerable efforts are still needed to restore debt to pre-crisis levels in some jurisdictions. The chapter goes on to look at past large-scale consolidation episodes in order to gauge how governments – both central and sub-central – have succeeded in consolidating after economic and fiscal crises. Finally, it surveys policy instruments that could help achieve consolidation while spurring economic activity.