FISCAL CONSOLIDATION AND DECENTRALISATION: A TALE OF TWO TIERS

provided by Research Papers in Economics

FISCAL CONSOLIDATION AND DECENTRALISATION:

A TALE OF TWO TIERS

Julia Darby

University of Strathclyde

V. Anton Muscatelli

University of Glasgow

Graeme Roy

University of Glasgow

February 2004

Abstract:

This paper contributes to the established literature on fiscal consolidations (e.g. Alesina and
Perotti, 1995, 1997, Alesina et al, 1998) by investigating the distinct behaviour of central and
sub-central tiers of government during general government consolidation attempts. In the light
of different degrees of decentralisation across OECD countries, and the different
responsibilities devolved to sub-central tiers, we believe that this approach offers an
illuminating insight into the analysis of fiscal consolidations and their success.

We show that the involvement of the sub-central tiers of government is crucial to achieving
cuts in expenditure, particularly in relation to the overall size of the government wage bill. In
addition, central governments appear to exert a strong influence on the expenditure of sub-
central tiers through their grant allocations, and control of these allocations appears to have a
considerable impact upon the overall success of consolidation attempts. Finally we
demonstrate that there is a skewness in cuts towards sub-central capital expenditure both
when central governments cut grant allocations and when sub-central governments engage in
lone consolidation attempts.

JEL Codes: E62, E65, H77, H11

Acknowledgements :

We would like to thank John Bradley, Jacques Melitz, participants at the 2003 SGPE
Workshop for comments on an earlier draft of this paper. Julia Darby gratefully acknowledges
ESRC funding under the Devolution and Constitutional Change Programme, Award Number
L2192102. This paper draws on work from Graeme Roy’s PhD thesis, ESRC Award Number
R42200134409.

Corresponding Author:

Graeme Roy, Department of Economics, University of Glasgow, G12 8RT.

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