The fiscal impact of decentralisation: Evidence from Danish local governments

Abstract

The influence of sub-national political entities is constitutionally sheltered in federalist states. However, decentralisation of political power from central to local government has also gained foothold in unitary states, notably in the Scandinavian countries. In Scandinavia, Denmark stands out as the most decentralised country, probably even more so than most federalist states. The article addresses the fiscal consequences of this decentralisation. On the one hand, fiscal federalist theory expects decentralisation to lead to less local spending. On the other hand, mainstream decentralisation theory as well as classic economic theory predicts that this is not necessarily so: it depends on the preferences of the local population. Thus, if there are pro spending voter attitudes, decentralisation is likely to increase local spending. The evidence from Danish local governments supports the latter interpretation of the merits of decentralisation. Local governments are not more fiscally prudent than central government, but their spending patterns are much more in line with voter than central policy maker preferences.