The impact of fiscal decentralisation on education and other types of spending

Scholars have argued about the impact of fiscal decentralisation on public spending for a long time without coming to any firm theoretical and empirical conclusions. In contrast to earlier studies, this paper looks at the impact of fiscal decentralisation across different types of spending. It is argued that the impact varies and can be positive or negative, depending on the distribution of spending across levels of government. A simple model is developed to show that local competition in the provision of local/regional public goods (e.g. education) can result in higher spending. However, when public goods are provided at the national level (e.g. pension policies), fiscal decentralisation encourages local policy pre-emption, thus lowering spending. The model is tested empirically by means of a pooled time series analysis of education, social spending and public spending in OECD countries from 1980 to 2001.