Fiscal decentralization and the size of government: a European country empirical analysis

Abstract

This article is an original contribution to the understanding of the relationship between fiscal decentralization and government size. Using a panel data set of the EU-15 countries, we analyse the effect of decentralization on aggregate, national and subnational government sizes by separating the long run effects of decentralization from its short run dynamics. In the long run, tax autonomy reduces central expenditure but increases—and to a greater extent—subnational public expenditure, leading to higher aggregate public expenditure. We find also that vertical imbalances tend to increase the sizes of subnational, national and aggregate governments.