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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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Fiscal Consolidation Across Government Levels - Part 3. Intergovernmental Grants, Pro- or Counter-cyclical?
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- Hansjörg Blöchliger1, Balázs Égert1
- Author Affiliations
- 1: OECD, France
- 28 June 2013
- Bibliographic information
This paper provides empirical analysis that measures the cyclical properties of intergovernmental transfers (or grants). Modelling a fiscal policy reaction function this paper tests whether the transfers systems in OECD countries are pro- or counter-cyclical, i.e. whether they offset cyclical fluctuations of sub-central economies or, on the contrary, exacerbate them. Regression results suggest that transfer systems tend to be pro-cyclical in general and in more than half of OECD countries they tend to destabilise sub-central budgets. Transfer pro-cyclicality may be the result of several factors: Transfer spending is often determined as a share of central government tax revenue, which itself tends to fluctuate with the cycle. Moreover, many grants are matching sub-central spending and hence tend to exacerbate fluctuations of that sub-central spending. Pro-cyclical grants could partly explain the often observed pro-cyclicality of subcentral government fiscal policy.
- pro-cyclicality, stabilisation, fiscal federalism, intergovernmental grants
- JEL Classification:
- H42: Public Economics / Publicly Provided Goods / Publicly Provided Private Goods
- H50: Public Economics / National Government Expenditures and Related Policies / General
- H77: Public Economics / State and Local Government; Intergovernmental Relations / Intergovernmental Relations; Federalism; Secession