Studies in Fiscal Federalism and State-local Finance series
Chapter 8: Conclusion: balancing subnational fiscal autonomy and overall fiscal stability
In the present study, my research was led by the question of how governments can forge their country’s macroeconomic destiny and what institutional conditions will allow them to do so. More specifically, my aim was to investigate the role of budgetary institutions in fiscal stabilization in emerging market nations. In the theoretical parts of the book, I developed an argument about interactions between national-level budgetary institutions and subnational fiscal discipline in countries allowing their subnational governments different degrees of spending autonomy. Budgetary institutions include the rules, laws and hierarchical procedures that determine how well the government and the legislature on the national level can coordinate to pass fiscally responsible government budgets. My point is that more centralized budgetary institutions on the central or horizontal level of government are likely to improve fiscal outcomes on all levels of government for more than one reason. The first is that finance ministers and/or leaders of a country find it easier to constrain those budget players – within government and in the legislature – who have the strongest incentives to ‘over-fish’ the common pool resource, the national tax pool. Second, I argue that centralizing budget processes on the horizontal level also affects subnational fiscal discipline.
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