Fiscal adjustment, decentralisation and sub-national autonomy

This paper studies the relationship between fiscal decentralisation and the duration of the fiscal consolidation episodes in 17 OECD countries between 1978 and 2009. It appears that consolidation lasts longer when expenditure decentralisation is higher. The paper also finds that transfers from higher levels of government are reduced during consolidation episodes. This suggests that, given a certain institutional structure within the country, central governments are able to shift the burden of consolidation towards lower tiers of government by reducing intergovernmental transfers. This is particularly the case when sub-national governments have little legal autonomy to raise tax revenues and cannot affect executive decisions taken at the central level.