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Fiscal Decentralisation and Inclusive Growth

image of Fiscal Decentralisation and Inclusive Growth

Intergovernmental fiscal frameworks, as considered by the OECD Network on Fiscal Relations Across Levels of Government, are a core driver of inclusive growth. Certain institutions and policies can contribute to a more equitable distribution of economic gains across jurisdictions and income groups, such as equalisation systems. In particular, the quality of public sector outcomes depends on how responsibilities and functions such as education or health care are shared across government levels. This implies that intergovernmental fiscal frameworks, which drive the division of roles of the central and sub-national governments, critically influence growth and the inclusiveness of an economy. This book brings together academics and practitioners to address key aspects of intergovernmental fiscal relations and country experience, as they relate to inclusive growth.

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Fiscal decentralisation and economic growth

This chapter deals with the relationship between fiscal decentralisation and economic growth. Using a novel empirical approach, the analysis suggests that decentralisation tends to be supportive of economic growth. Decentralisation of tax revenues tends to have a stronger impact than spending decentralisation, especially when government is small. Intergovernmental transfers, covering a large part of sub-central spending in most countries, are associated with slower growth, which could point at common-pool problems and a lack of incentives for own-source development. Balanced decentralisation – i.e. when the various policy functions are decentralised to a similar extent – is conducive to growth. Balanced decentralisation allows sub-national governments to better co-ordinate policy and to reap economies of scale and scope across functions. While public investment tends to have a positive growth effect overall, its decentralisation is negatively associated with growth.

English

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