FISCAL CONSOLIDATION AND DECENTRALISATION: A TALE OF TWO TIERS

Table 10: Composition of adjustments during lone sub-central consolidation attempts²⁵
(each shown as % of GDP)

Relative to the pattern observed during general government consolidations, changes in
revenues appear to be relied upon more extensively in lone sub-central consolidations. The
revenue raising comes from both autonomous sources (i.e. “own” tax revenues and to a far
lesser extent non-tax revenues), as well as higher grants allocations from central
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government.

In summary, there are clear distinctions between changes in sub-central revenues and
expenditures that occur as part of a general fiscal adjustment and those that occur during an
independent consolidation implemented by the sub-central tier. When central government
consolidates it may force sub-central governments to cut particular expenditures, such as the
wage bill, perhaps in part through centrally agreed pay settlements or through the grant
system. In contrast, when sub-central governments consolidate alone, it would appear that
brunt of the adjustment is made in own tax revenues and capital expenditure, sometimes
assisted by increases in grant allocations from the central tier.

5: Conclusions

In this paper we have examined fiscal consolidation attempts across a range of OECD
countries. We have verified a result from the existing literature that successful general

²⁵ Standard deviations are given in brackets, but given the relatively small degrees of freedom and
reasonable measure of ‘success’ we do not make a distinction between successful and unsuccessful
consolidations.

²⁶ The figures for changes in grants also contain two substantial positive outliers, which match those in the current
expenditure calculations above. In fact these sub-central consolidations were conducted in conjunction with a

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