Redistributive policies in decentralised systems: The effect of decentralisation on subnational social spending

Abstract

AbstractThis article uses cross‐national data to examine the effects of fiscal and political decentralisation on subnational governments’ social expenditures. It revisits the benefit competition hypothesis put forward by fiscal federalism research, which posits that subnational governments in decentralised countries match welfare benefit reductions by their peers to keep taxes low and avoid an in‐migration of welfare dependents. As a consequence, subnational social expenditures are assumed to plateau at similar and low levels. Using a new cross‐national dataset on social expenditures in 334 subnational units across 14 countries and 21 years, the author explores whether benefit competition causes subnational governments to converge on similar levels of social spending. The analysis reveals that as countries decentralise, subnational social spending levels begin to diverge rather than converge, with some subnational governments reducing their social expenditures and others increasing them. Furthermore, decentralisation is not likely to be associated with lowest common denominator social policies, but with more variability in social expenditure. The article also examines the effects of other macro‐level institutions and demonstrates that policy coordination influences the relationship between decentralisation and subnational social spending levels.