A comprehensive anlysis of expenditure decentralization and of the composition of local public spending

Many countries have recently implemented fiscal decentralization reforms, assigning more functions and spending responsibilities to sub-national governments. In this paper we investigate the reasons behind the decentralization process of different categories of government expenditure (such as health, education, social security and welfare, housing, transports, public order) using IMF and OECD data for 21 developed countries over the period 1972-2006. We pay particular attention to the roles played by the taxing power of sub-national governments and by grants received from upper tiers of government. Then, we also study the determinants of the composition of local expenditure. Using a general-to-specific empirical approach, we adopt different models for each of the spending functions under analysis. This leads to a number of results, not yet reached in the existing literature, on the importance of tax decentralization, demographics, politics, and a number of other socio-economic variables.