Decentralization and sectoral expenditures in Europe

ABSTRACT

This article presents an empirical analysis of the recent impact of fiscal decentralization in Europe on total expenditure for specific government functions as well as on total government size. A panel data set for the years 2000–2009 for European countries has been constructed from EUROSTAT data. The effects of decentralization interact with the degree of vertical imbalances and tend to be negative as predicted by the Leviathan view of government. Effects vary strongly across government functions and are strongest in relative terms for social spending and infrastructure. Moderate restraining effects are found for education, while health spending is not significantly affected. This is consistent with competition between subnational entities, which try to attract taxpayers and shift expenses away from policies that benefit neighbouring jurisdictions.

KEYWORDS:

• Decentralization
• vertical imbalance
• Leviathan
• government size

JEL CLASSIFICATION:

• H77
• H75
• H40
• H54
• H55

Acknowledgement

This work has benefited from financial support from GRASP (‘Growth and Sustainability Policies for Europe’), a Collaborative Project supported by the European Commission’s Socio-Economics and Humanities, 7th Framework Programme for Research.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The infrastructure variable was aggregated from the following subcategories: Fuel and energy; Mining, manufacturing and construction; Transport; Communication; R&D Economic affairs; Waste management; Waste water management; Housing development; Community development; Water supply; Street lighting.

² See xtoverid (Schaffer and Stillman 2011). The test is equivalent to a Hausman test in the case of homoscedastic errors.

³ Treisman (2002) proposes several legislative measures of decentralization, but these do not vary over time.