Fiscal decentralization and the size of the government : an extension with evidence from cross-country data

Prior analyses of the relationship between fiscal decentralization and the size of government treat fiscal decentralization as the decentralization of either taxing or spending powers. But decisions about taxation and spending are inseparable. The author corrects this deficiency and analyzes the effect of simultaneous decentralization of taxing and spending powers -"fiscal decentralization"- on the overall size of the public sector using cross-country data. The economic results of his study show that: (a) The simultaneous decentralization of the national government's taxing and spending powers tend to reduce the size of the public sector. (b) The Revenue-sharing arrangements in which decisions about taxation are made by the national government tend to eliminate the constraining effect of the decentralized spending power. What do these findings suggest? Countries, such as economies in transition, that want to reduce the size of the public sector should decentralize both taxing and spending decisions.