Fiscal Decentralization and Budget Control

Fiscal Decentralization and Budget Control

Studies in Fiscal Federalism and State-local Finance series

Laura Von Daniels

Fiscal Decentralization and Budget Control explores possible institutional solutions to fiscal instability in countries that have traditionally been caught up in problems of over-expenditure and over-indebtedness. How can governments control spending pressure from influential groups, often representing historically grown regional interests? Drawing on a mix of statistical analyses and case studies in institutional theory, the book provides new insights on previous stabilizations in Latin America and facilitates a better understanding of common dynamics of deficits and debt accumulation.

Chapter 3: Fiscal institutions and their effects on public households

Laura Von Daniels

Subjects: development studies, development economics, economics and finance, political economy, politics and public policy, political economy, public policy


In this chapter, I develop an argument about the effects of decentralized fiscal authority, drawing mainly on two branches of literature discussed in Chapter 2 – the budgetary institutions and the fiscal federalism literature. In the existing academic literature, authors generally treat the effects of vertical fiscal decentralization and decentralization of the budget process on the national – horizontal – level as separate problems. Expanding on these contributions, I suggest a different approach to budgetary policy making in a fiscally federal context. My goal is to arrive at a model that allows me to treat the consequences of decentralized budget making – both at the national and subnational levels – in a single analytical framework. First, I start from the premise that vertical fiscal decentralization destabilizes overall government fiscal outcomes under certain circumstances. In line with much of the fiscal federalism literature, I assume decentralization to exert destabilizing effects, as long as there are no hard budget constraints on subcentral budget actors. Without budget constraints on local politicians, a decision to delegate more authority to subnational governments in expenditure sets incentives for local budget actors to draw on the common national tax base to capitalize on it politically, in the local political arena, without bearing the costs of rising public expenditure and debt. One way to solve such common pool resource problems would consist in installing local-level budget constraints. Such an approach seems reasonable in certain political and institutional contexts.

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