Fiscal decentralization and public debt

Excessive borrowing by subnational governments due to soft budget constraints and intergovernmental coordination failures might be one of the perils of decentralization. Despite a large body of case studies, empirical investigations on whether decentralization increases consolidated public debt levels are still scarce. This paper contributes to the literature by exploring econometrically for several European countries whether the level of decentralization has an impact on the consolidated government debt to GDP ratio. We find that expenditure and revenue decentralization tend to reduce the debt to GDP ratio. The size of the subnational sector, however, is positively related to the ratio.