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.



Local government revenue decentralisation and funding divergence: An English case study

For revenues, sub-national governments rely on a mix of grants from central government; locally-raised taxes; and locally-raised user fees and charges. It is not only the balance of these sources, but also the rules around tax and fee policy and fiscal equalisation that affect funding outcomes and the fiscal incentives faced by subnational governments. We use an ongoing shift in England’s local government finance system from equalising grants to a greater reliance on local tax revenues, aimed at incentivising growth, as a case study of the trade-offs between equalisation and incentives inherent in sub-national finance. In particular using data from 2006–07 to 2013–14, we show the significant fiscal disparities between local government units in England, and the factors that correlate with the size and changes in these disparities over time. We model proposed reforms to England’s local government finance system and show that even if revenues are initially fully equalised relative to assessed spending needs, significant fiscal disparities can re-emerge in just a few years. However, the scale of these balances depends significantly on specific design choices such as marginal equalisation for those units seeing the largest shortfalls in revenue, and revenue sharing in areas with two-tier local government.


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