Fiscal Decentralization and Deficits : International Evidence

The literature on socio economic implications of fiscal decentralization (FD) has recently been expanding, though only very few studies to day have looked at its macroeconomic effects. This paper investigates the relationship between FD and budget deficits. Using panel data techniques, we provide strong empirical evidence that expenditure decentralization has a significant negative relationship with budget deficits. Moreover, among the many possible factors that the literature suggests to reinforce this relationship, country size appears to be significant. The paper also presents significant evidence that, the negative effect of revenue decentralization on budget deficits is captured in the case of good governance only