EFFECTS OF FISCAL DECENTRALIZATION ON PUBLIC SECTOR GROWTH IN AUSTRIA

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EFFECTS OF FISCAL DECENTRALIZATION ON PUBLIC SECTOR GROWTH IN AUSTRIA Powered By Docstoc
					 EFFECTS OF FISCAL DECENTRALIZA-
  TION ON PUBLIC SECTOR GROWTH
            IN AUSTRIA

                    Johann Bröthaler
             Vienna University of Technology

                                and

         Michael Getzner (corresponding author)
               University of Klagenfurt

ABSTRACT
     The determinants of the growth of the public sector have
drawn significant attention by researchers with an increasing focus
on the effects of fiscal federalism. The objective of the paper is to
test whether fiscal decentralization contributes to the growth of
government expenditure in Austria for the period of 1955 to 2007.
The empirical results of this paper suggest that the commonly
hypothesized determinants of total government expenditure may
bear some explanatory power in Austrian fiscal policies. Govern-
ment expenditures seem to be determined by GDP with increases of
the size of the public sector until about mid-1990s. Expenditures
react to active fiscal policies influencing the unemployment rate.
There is also some indication of fiscal illusion of policy makers.
We find that fiscal decentralization measured by the share of sub-
national expenditure to total government expenditure has a damp-
ening effect on total government expenditure, thus corroborating
the hypothesis of the efficiency of a federal system. However, de-
centralization in the Austrian system is mainly attributable to the
significant growth of grants from the national to the sub-national
levels of government. Our conclusions therefore cannot be gener-
alized in terms of an efficiency advantage of a federal over a cen-
tralized system.




Public Finance and Management
Volume 10, Number 1, pp. 169-205
2010
170                                  Bröthaler & Getzner


1. INTRODUCTION

    At the latest since the Maastricht Treaty (signed in
1992), and the Stability and Growth Pact, fiscal policies
have been on the political agenda in the European Un-
ion. However, the debate on the efficiency of public
provision of goods and services, and of the distribution
funct
				
DOCUMENT INFO
Description: The determinants of the growth of the public sector have drawn significant attention by researchers with an increasing focus on the effects of fiscal federalism. The objective of the paper is to test whether fiscal decentralization contributes to the growth of government expenditure in Austria for the period of 1955 to 2007. The empirical results of this paper suggest that the commonly hypothesized determinants of total government expenditure may bear some explanatory power in Austrian fiscal policies. Government expenditures seem to be determined by GDP with increases of the size of the public sector until about mid-1990s. Expenditures react to active fiscal policies influencing the unemployment rate. There is also some indication of fiscal illusion of policy makers. We find that fiscal decentralization measured by the share of sub-national expenditure to total government expenditure has a dampening effect on total government expenditure, thus corroborating the hypothesis of the efficiency of a federal system. However, decentralization in the Austrian system is mainly attributable to the significant growth of grants from the national to the sub-national levels of government. Our conclusions therefore cannot be generalized in terms of an efficiency advantage of a federal over a centralized system. [PUBLICATION ABSTRACT]
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