Academic journal article International Advances in Economic Research

Fiscal Autonomy and Total Government Expenditure: An Austrian Case-Study

Academic journal article International Advances in Economic Research

Fiscal Autonomy and Total Government Expenditure: An Austrian Case-Study

Article excerpt

DOI 10.1007/s11294-011-9301-8

Published online: 21 April 2011 [c] International Atlantic Economic Society 2011

Abstract The ongoing debate on the efficiency of a federal system versus a centralized system has lead to a diverse and unclear empirical picture of the effects of fiscal decentralization on public sector growth. For analyzing these effects it is crucial to consider the sub-national decision power on taxing and spending. In the current paper, we test for the effects of fiscal autonomy on total government expenditure using time series from 1955 to 2007 for Austria. Determinants of government expenditure are economic growth, fiscal illusion of policy makers, and the unemployment rate. We additionally account for different degrees of sub-national fiscal autonomy. Our econometric results suggest that the often-hypothesized dampening effects of fiscal autonomy cannot be corroborated for the Austrian system.

Keywords Fiscal autonomy * Decentralization * Federalism * Growth of public sector * Public expenditure

JEL H6 * E6 * H7

Introduction

The search for efficient fiscal policies following the Maastricht Treaty and the Stability and Growth Pact, not only aims at measures to reduce government deficits and public debt. The debate also focuses on the adequate institutions of a fiscal system in terms of federalism and the distribution of decision authority among different levels of government.

Paper presented at the 69th International Atlantic Economic Conference, Prague, Czech Republic, 24-27 March 2010.

Federalism has often been sketched as a way to improve efficiency for selected public tasks, as sub-national governments are said to be closer to the people. Therefore, the informational basis for the provision of local/regional public goods is richer at the local/regional level of government than at the central government's level. A federal system can, in theory, also lead to a more efficient provision of these goods since decision-makers are closer to their taxpayers and, thus, have a stronger incentive to use funds economically.

Government expenditures in general have been explored by a number of theoretical and empirical approaches, such as Wagner's Law of Growing State Activities (assuming a positive relation between income and the share of public expenditure to GDP), Baumol's cost disease (growing public expenditure due to the increase of costs in the production of services), the displacement effect of Peacock-Wiseman (one-time or permanent shifts due to a dramatic event such as a war or natural catastrophe), and several other politico-economic determinants of public choice theories (e.g., political business cycle, ideology and form of government, and institutions).

The current paper explores the question whether fiscal autonomy in the sense of taxing and/or spending authority of sub-national governments leads to a more efficient use of public funds (in terms of total government expenditure). Our approach builds on prior evidence for the case of Austria (Getzner et al. 2001; Neck and Getzner 2007; Brothaler and Getzner 2010). Thus, we do not concentrate on whether fiscal decentralization contributes to economic growth (cf. Akai and Sakata 2002; Thiessen 2006). We rather present evidence for the specific example of the Austrian system (cf. Bergvall et al. 2006; Darby et al. 2002; Freitag and Vatter 2008; Rodden 2002). The results of the current paper indicate that fiscal decentralization may reduce government expenditure by restricting the discretionary use of funds of sub-national governments provided by intergovernmental transfers. There is, however, no empirical evidence for Austria that fiscal autonomy contributes to a more efficient system in terms of a reducing or dampening effect on total government expenditure.

The paper is structured as follows. The first section gives a brief overview on the general effects of fiscal decentralization on public sector growth. …

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