Would less fiscal decentralization reduce public sector size across sectors in Europe?

This paper presents an empirical analysis of the recent impact of fiscal decentralization in Europe on total expenditure for specific government functions as well as on total government size. A panel dataset for the years 2000 to 2009 for European countries has been constructed from EUROSTAT data. The effects of decentralization interact with the degree of vertical imbalances and tend to be negative as predicted by the Leviathan view of government. Effects vary strongly across government functions and are strongest in relative terms for infrastructure and social spending. Moderate restraining effects are found for education, while health spending is not significantly affected. 1 The paper has benefited from financial support from GRASP (“Growth and Sustainability Policies for Europe), a Collaborative Project supported by the European Commission’s Socio-Economics and Humanities, 7th Framework Programme for Research.