revenue, or to borrow, so cuts imposed directly constrain the expenditure of sub-central
authorities. The close correlation between cuts in grants and cuts in expenditure is essentially
the reverse of the ‘Fly-Paper Effect’ documented by Gramlich [1977] and others23. Again, we
note that a downside of this relationship the substantial cut in public investment discussed
above in relation to Table 6. Together these results suggests that it may be desirable for
central governments to consider offering greater protection to regional and local public
investment programs when following a strategy of cutting grant allocations.
4.5 Consolidation attempts implemented by Sub-Central Tiers of Government
Our analysis so far has focussed on consolidation attempts identified in general government
data, the majority of which will have been instigated at the central government level. In this
section we turn our attention to consolidations solely identified in sub-central government
data. Here we explore the timing and composition of the adjustments undertaken by sub
central tiers of government and contrast these results with their behaviour during general
government consolidation attempts. We are unaware of any previous studies that have looked
at the mechanics of how sub-central governments consolidate. A key question is whether the
sub-central tiers behave differently when consolidating alone as opposed to when they adjust
in conjunction with the centre.
Our final table concentrates on the composition of the 20 consolidation attempts identified in
the sub-central government data that do not correspond to consolidation attempts at the
general government level.
A striking feature of consolidation attempts enacted by sub-central tiers alone is that cuts in
capital expenditure dwarf those in other components of expenditure, and the wage bill
actually increases as a percentage of GDP24. Overall, cuts in capital expenditure occur in 15
out of the 20 observed consolidations while cuts in current expenditure occur in only 9
instances. We can surmise that this bias toward capital spending may reflect a lack of
alternatives given allocated spending commitments and constraints on required standards of
provision imposed by central governments. It is also potentially consistent with myopic
behaviour of local politicians who may wish to preserve current services at the expense of
public investment. Finally, if the benefits of sub-central investment are not all captured within
the region, externalities in the form of spillovers to other regions may also result in tendency
to under-provision when financing constraints are tightened.
23 The ‘Fly-Paper Effect’ refers to the empirical phenomenon that increases in lump-sum transfers to sub-central
tiers stimulates increases in local spending to a far greater extent than increases in local income.
24 The figures for spending on goods and services and for total expenditure are somewhat influenced by two
outliers relating to Finland and the UK in 1975, but nonetheless, the clear message is that relative burden of
expenditure adjustment is centred upon public sector investment.
20