A comprehensive analysis of expenditure decentralization and of the composition of local public spending

Abstract

Many industrialized countries have recently implemented fiscal decentralization reforms assigning more competences and spending responsibilities to sub-national governments. In this paper we investigate what leads to the decentralization of different categories of public expenditure in 19 developed countries over the period 1980-2006. Adopting a general-to specific empirical approach, we estimate different models for each of the spending functions under analysis. Our results confirm existing findings on the negative link between regional income disparities and expenditure decentralization. A similarly negative relationship is found for a set of demographic variables, leading to the conclusion that macroeconomic and, more importantly, political factors are the key to explain the recently increased decentralization levels in most industrialized countries. Finally, we complete our analysis by studying what determines the sub-national expenditure composition, finding that political and demographic changes are the most important factors in shaping the local spending mix.