FISCAL CONSOLIDATION AND DECENTRALISATION: A TALE OF TWO TIERS

are identified as ‘own-source’ if the sub-central authorities have the ability to control the tax
rate, or the tax base, or both.

As we would expect, the figures in Table 8 confirm that the largest source of increased
revenues during consolidations stems from taxation and is mostly driven by changes at the
central tier. Results relating to our success index support the view that outright failed
consolidations, where SI=0, rely to a far greater extent upon tax hikes (as opposed to cuts in
expenditure) than do successful ones.

Table 9: Autonomous sub-central changes in tax revenue during consolidation attempts
(each shown as % of GDP)

Table 9 demonstrates that autonomous or ‘own-source’ changes in sub-central taxation
contribute a sizeable proportion of overall tax adjustment during consolidation attempts. The
two least successful consolidations (SI=1,0) typically involve the largest increases in sub-
central governments’ ‘own-source’ taxation.

Conclusive results are uncovered in Table 8 in relation to non-tax revenues (typically these
comprise user charges and fees). When either tier of government tries raise additional
revenues from these sources the consolidation is likely to fail. Indeed, successful
consolidation attempts appear to be associated with a decline, rather than a rise, in non-tax
revenues. The difference is statistically significant in each case.

The behaviour of grants from other tiers of government, again highlighted in Table 8, are also
of clear interest. In successful consolidation attempts, grants to sub-central tiers of
government are cut substantially while in failed consolidation attempts grants appear to alter
very little. The difference between the average changes is statistically significant at the 1%
level. These results appear to show that central governments have been more successful in
consolidation attempts when they have ‘forced the hands’ of the sub-central tiers through
reducing their grant allocations. Grant allocations tend to be highly visible and politically
sensitive, so it seems reasonable to deduce that cuts in grants can have a strong signalling
effect, thereby indicating that the central government is serious about addressing the fiscal
position. In many cases the sub-central tier have little autonomy to raise other sources of

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