FISCAL CONSOLIDATION AND DECENTRALISATION: A TALE OF TWO TIERS

of government. The final column of the table indicates whether the difference between
average impulses in successful as opposed to failed consolidation attempts is statistically
significant on the basis of a two sample t-test¹⁵.

Table 3: Discretionary fiscal impulses during General Government consolidation attempts
(each shown as % of GDP)

The above results confirm that the average discretionary impulse at general government level,
where general = central + sub-central, is larger in successful as opposed to failed consolidation
attempts (as found by Alesina and Perotti [1995], Alesina et al. [1998] and Von Hagen et al.
[2001]). The size of the central government fiscal impulse is larger in successful as opposed to
failed consolidation attempts and this difference is statistically significant at the 10% level. In
addition, the lower panel of the table reveals that the size of the central impulse is increasing in
the degree of success (as measured by the Success Index). Sub-central impulses are also larger
on average during successful as opposed to failed consolidation attempts but this difference is
not statistically significant. The results based on the success index are more revealing: in the
most successful consolidation attempts there are relatively large sub-central impulses but the
average impulse is largest overall for the failed category, SI=0. It is interesting to note that in
the more successful adjustments (SI=3,2,1) the sub-central tier achieves around 10-15% of the
total impulse on average, while in the least successful case the sub-central tier’s contribution
exceeds 30% and the overall general impulse is relatively small. We can interpret these results
as demonstrating that the dominant adjustment in general government consolidation attempts
is made by the central tier, though sub-central tiers of government are generally actively
involved too; also, if the consolidation effort is skewed toward the sub-central tier, the attempt
is less likely to be successful.

¹⁵ The null hypothesis in each case is that the size of the impulse is identical in successful and failed consolidation
attempts. A single ‘*’ in the “signif:” column denotes significance at the 10% level, while ‘**’ and ‘*’ denote
significance at the 5% and 1% levels respectively.

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