Measuring Fiscal Decentralisation

Concepts and Policies

image of Measuring Fiscal Decentralisation

When trying to measure fiscal decentralisation, the OECD Network on Fiscal Relations Across Government Levels has made significant progress in the last years, especially on tax autonomy of sub-central governments. But in many respects, real-world fiscal decentralisation still escapes the measuring tools, especially when it comes to measure the spending power of sub-central governments or the various regulations attached to intergovernmental grants. This book deals with two interrelated issues. The first concerns  the various measurement of fiscal decentralization in general and their usefulness for policy analysis. The second and more specific issue concerns the taxonomy of intergovernmental grants and the  limits of the current classifications, and how policy changes to the intergovernmental grants framework may require that measurement devices be adapted.


The role of decentralisation indicators in empirical research

This chapter examines the role of decentralisation indicators and their use for empirical research. The chapter reviews first the conventional approach for capturing the degree of fiscal decentralisation. Second, in order to capture the effects of fiscal decentralisation in empirical research, the data and estimation issues are discussed. Third, the construction of indicators to capture the degree of fiscal decentralisation should be informed by recent incentive theory. Even if a transfer is a lump sum, incentive effects may still exist. The concept of the soft budget constraint is useful for understanding the incentive structure behind lump sum transfers. The design and the timing of transfers are important. If the transfer is designed and allocated ex post after local government has undertaken specific actions, the transfer should not be regarded as a lump sum transfer ex post. The theoretical models suggest that a taxonomy of transfers is complicated and indicators of fiscal decentralisation should be carefully designed.


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