The Equity Reasons for Fiscal (De)Centralisation

Abstract

The aim of this paper is to analyze the influence of regional economic disparities on the fiscal decentralisation processes in 21 OECD countries over the period 1981-2005. We use novel and robust measures of fiscal decentralisation based on differences in the degree of both expenditure and tax autonomy. Our results show that high regional economic disparities call for lower fiscal decentralisation and highlight the importance of the nature of both expenditure and tax decentralisation. More importantly, the extent to which responsibility and decision powers are really left to sub-central governments appears to be crucial. Thus, from a positive point of view, equity considerations suggest avoidance of fiscal federalism in countries with substantial regional economic disparities, notwithstanding the well-known efficiency gains.