OECD Economic Policy Papers

The OECD Economic Policy Papers series is designed to make available selected studies on structural and macro-economic policy issues of current interest. The Papers are produced in the context of the work carried out on the two regular OECD titles, OECD Economic Outlook and Going for Growth.


Does Fiscal Decentralisation Foster Regional Convergence?

Across the OECD, GDP per capita is converging. In contrast, regional disparities – or differences in GDP per capita across jurisdictions – are rising, mainly as a result of widening productivity differences. Fiscal decentralisation could help reduce them again. According to new OECD research, assigning more ownsource revenue to sub-national governments dampens regional GDP disparities and underpins regional convergence. In more decentralised settings, catching-up regions appear to adopt policy innovations more rapidly and their policy innovations have a stronger impact. Conversely, intergovernmental grants tend to fuel disparities, probably because they discourage lagging regions to develop their economic and fiscal base. However, when replacing intergovernmental transfers by own-source revenue, lower disparities in regional output may come at the cost of larger disparities in regional income and more unequal public service standards. Reforms to intergovernmental fiscal frameworks should therefore be two-pronged: a rise in sub-national own-source revenue should be paired with a re-design of intergovernmental transfers and fiscal equalisation, in order to make all jurisdictions enjoy the benefits of more sub-central fiscal power.


Keywords: intergovernmental relations, fiscal autonomy, fiscal decentralisation, fiscal equalisation, intergovernmental transfers, regional disparities
JEL: H70: Public Economics / State and Local Government; Intergovernmental Relations / State and Local Government; Intergovernmental Relations: General; D63: Microeconomics / Welfare Economics / Equity, Justice, Inequality, and Other Normative Criteria and Measurement; H10: Public Economics / Structure and Scope of Government / Structure and Scope of Government: General; I38: Health, Education, and Welfare / Welfare, Well-Being, and Poverty / Welfare, Well-Being, and Poverty: Government Policy; Provision and Effects of Welfare Programs; H75: Public Economics / State and Local Government; Intergovernmental Relations / State and Local Government: Health; Education; Welfare; Public Pensions; H71: Public Economics / State and Local Government; Intergovernmental Relations / State and Local Taxation, Subsidies, and Revenue; H77: Public Economics / State and Local Government; Intergovernmental Relations / Intergovernmental Relations; Federalism; Secession
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