What is it about?

How does fiscal decentralization influence fiscal discipline and the probability of a fiscal crisis?

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Why is it important?

Decentralization of fiscal operations to local governments could affect the efficiency of public service delivery and change the fiscal discipline of the government. Localized policymaking could improve efficiency by more closely matching the preferences of citizens as well as more accurately collecting information on the local economy, while a common resource pool and a soft budget constraint could loosen discipline through overborrowing and overspending.


We find that crisis probability is associated positively with spending decentralization and negatively with vertical fiscal imbalance. These effects are prevalent in countries with a higher degree of tax revenue decentralization. The findings imply that reduced risk sharing against local shocks under tax revenue decentralization destabilizes the sustainability of a nation's fiscal system. Therefore, policymakers should be cognizant of the undesirable impacts of decentralization on fiscal crisis and indiscipline.

Dr. Ryota Nakatani
International Monetary Fund

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This page is a summary of: Fiscal crises, decentralization, and indiscipline, Scottish Journal of Political Economy, July 2023, Wiley, DOI: 10.1111/sjpe.12358.
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