Fiscal decentralisation and economic growth

Abstract

This chapter deals with the relationship between fiscal decentralisation and economic growth. Using a novel empirical approach, the analysis suggests that decentralisation tends to be supportive of economic growth. Decentralisation of tax revenues tends to have a stronger impact than spending decentralisation, especially when government is small. Intergovernmental transfers, covering a large part of sub-central spending in most countries, are associated with slower growth, which could point at common-pool problems and a lack of incentives for own-source development. Balanced decentralisation – i.e. when the various policy functions are decentralised to a similar extent – is conducive to growth. Balanced decentralisation allows sub-national governments to better co-ordinate policy and to reap economies of scale and scope across functions. While public investment tends to have a positive growth effect overall, its decentralisation is negatively associated with growth.