Decentralization and sectoral expenditures in Europe

This article 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 data set for the years 2000–2009 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 social spending and infrastructure. Moderate restraining effects are found for education, while health spending is not significantly affected. This is consistent with competition between subnational entities, which try to attract taxpayers and shift expenses away from policies that benefit neighbouring jurisdictions.