Fiscal Decentralisation and Regional Disparities

Abstract

Fiscal decentralisation can lead to a more efficient provision of local public goods and services and promote a better match between policies and citizens’ preferences. At the same time, however, there are concerns about whether all regions will gain from more autonomy. Decentralisation may not lift all boats, with “poor” regions losing competitiveness with respect to better endowed ones, thus increasing regional disparities. The present work investigates the relationship between fiscal decentralisation and regional inequality within countries. Particular attention is paid to the different channels through which decentralisation can affect disparities: taxing powers, spending autonomy and the vertical fiscal imbalance. The empirical analysis, which is conducted on a sample of 30 OECD countries for the period 1995-2011, suggests that a balanced fiscal structure, where local spending is mainly financed by local taxation, reduces regional disparities, by providing an incentive to better use local resources and implement policies that favour economic development.