The impact of decentralisation on fiscal disparities among local authorities in Israel

Abstract

This study examines fiscal disparities among local authorities in Israel between 1972 and 1995. It argues that political and fiscal decentralisation increase disparities. Analysis is based on regression models and ranking of local authorities according to selected financial measures. Results confirm weakness of small municipalities in a system that lacks strong regional administration or sufficient inter‐municipal co‐operation. Arab municipalities are weak and suffer from discrimination, of a decreasing level, in the allocation of grants. Peripherally located municipalities weakened, but were compensated through equalisation grants. Decentralisation in Israel was an unplanned transition towards an ‘American’ self‐government model. It led to increased fiscal disparities directly, and indirectly by encouraging municipal fragmentation, urban sprawl and competition over tax‐generating development. Policy implications focus on the allocation of equalisation grants and on indirect measures to alleviate fiscal disparities, such as curbing further municipal fragmentation and the implementation of local tax‐base sharing mechanisms.