The impact of fiscal decentralisation on education and other types of spending

Abstract

Scholars have argued about the impact of fiscal decentralisation on public spending for a long time without coming to any firm theoretical and empirical conclusions. In contrast to earlier studies, this paper looks at the impact of fiscal decentralisation across different types of spending. The conventional wisdom of a “race to the bottom” in taxes and spending as a consequence of fiscal decentralization is juxtaposed to the recent literature on expenditure competition, which posits that expansive local competition results in higher spending in fiscally decentralized countries. We argue that the effects of fiscal decentralization should be seen most clearly for those types of policies which are provisioned mainly on the local/regional level. Empirically, we find a robust and positive association between fiscal decentralization and aggregate levels of education spending. However, when looking at public policies provided at the national level (e.g. pension policies), fiscal decentralisation is associated with lower levels of aggregate spending. The argument is tested empirically by means of cross-sectional regressions as well as a pooled time series analysis of education, pension, social and total public spending in OECD countries from 1980 to 2001.