Fiscal autonomy

During the past decade, the economic effects of fiscal decentralization have been increasingly investigated in empirical comparative studies. However, the promising expectations about the beneficial effects of fiscal federalism on welfare could, in general, not be confirmed by this line of research. This paper examines the following research proposal: does subnational fiscal autonomy promote budgetary discipline? A small, but positive budgetary impact of subnational fiscal autonomy was found in a panel study of 27 OECD countries, among which 7 federations, covering the period 1995-2009. This positive effect only prevails if subnational fiscal autonomy exceeds a minimum threshold level. Contrary to prior expectations, federal grants to subnational governments that do not enjoy this threshold level of fiscal autonomy, do not induce budgetary laxity.