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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 inclusive growth: An overview

Inclusive growth is now high on government agendas in many countries. This chapter provides an overview of the role of fiscal decentralisation for inclusive growth. Considering the large size of sub-national spending, the potential of fiscal decentralisation to enhance efficiency and equity is significant. But there are competing theories on the effect of fiscal decentralisation: according to normative public finance theory, fiscal equalisation has an important role to play for equity and efficiency. On the other hand, political economy theory suggests that reducing the vertical fiscal gap is good for government performance and economic growth. The empirical literature also shows mixed results. However, many empirical studies show that the interaction between fiscal decentralisation and institutions, the stage of economic development and political economy constraints exercise important roles in determining the success of fiscal decentralisation. Rather than rely on “one size fit all” prescriptions, policymakers should consider the importance of institutional complementarities to reap the full potential of fiscal decentralisation.

English

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