government consolidations tend to be based upon expenditure cuts as opposed to increases in
revenue. However, our main contribution is to explore the implications of fiscal
decentralisation for fiscal consolidation, an issue which appears to have been ignored in the
empirical literature to date.
We have demonstrated that most successful consolidation attempts involve concerted
adjustments by both central and sub-central tiers of government. We have also revealed that
the sub-central tier is crucial in achieving cuts in both capital and current expenditure, and
particularly in the wage bill, a key area in which cuts appear to result in sustained
improvement. We conclude that sub-central governments play a crucial role in helping the
success of a general consolidation. Further, we have shown that cuts in grants from central to
sub-central tiers of government tend to be made during successful consolidation attempts. We
suggest that these cuts act as both a visible signal of the central government’s intention to
consolidate and that they also ‘force the hand’ of the sub-central tier for which even marginal
changes in grants can have a major impact on expenditure, given their typically limited
alternative sources of revenues. An apparent downside appears to be the extent to which
forced adjustments to sub-central expenditures appear to be borne, by cuts in capital as
opposed to current expenditures.
The behaviour of sub-central tiers appears to differ, depending upon whether adjustment is
conducted as part of a general government consolidation effort or is conducted by sub-central
tier in isolation. The latter concentrate upon revenue increases and cuts in capital expenditure,
rather than focusing on areas that have been shown to result in more sustainable
improvements in fiscal balances at the general government level.
In future work, we hope to address the extent to which heterogeneity among different
country’s government structures impact upon the achievement of successful fiscal
consolidations. As we have seen, countries differ quite considerably with regard to the degree
of fiscal responsibility over elements of expenditure and in autonomy in revenues that is in
the hands of sub-central governments. If this heterogeneity can help explain the relative
successes and failures of consolidation efforts we should be able to consider issues relating to
institutional design that is beneficial to macro control with decentralisation.
period of decentralisation involving increases in sub-central current expenditure financed by increased top-down
grants. Upon eliminating these two observations the average change in grants falls to 0.19.
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