Vertical Fiscal Imbalances and Its Impact on Fiscal Performance: A Case for Indian States
01 Jan 2019-pp 243-282
TL;DR: In this paper, the authors examined the relation between vertical fiscal imbalance (VFI) and the performance of Indian states and provided stylized facts on size, financing and long-run trend of VFI for 24 major Indian states.
Abstract: Vertical fiscal imbalance (VFI) is defined as the share of sub-national governments’ own spending not financed through own revenues. Theoretical and empirical literatures on VFIs have identified them as an obstacle to sub-national accountability and good fiscal performance. India is a decentralized economy where a marked distinction is made between the spending and revenue responsibilities between the Centre and states. However, spending decentralization has not always complemented revenue devolution, giving rise to huge VFIs in the states. This paper attempts empirically to examine the relation between VFI and fiscal performance for Indian states. It provides stylized facts on size, financing and long-run trend of VFI for 24 major Indian states. Panel data estimation for all those states, covering the period 1995–96 to 2014–15, reveals that on an average the primary deficit of the state governments decline by 15 percentage point of Net State Domestic Product (NSDP) for each percentage point decline in VFI.
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TL;DR: In this paper, the authors explore the impact of decentralization on public debt and show that expenditure decentralization signicantly reduces public indebtedness, whereas tax decentralization and vertical fiscal imbalances are insignicant.
Abstract: Excessive borrowing by subnational governments is considered to be one of the perils of fiscal decentralization. On the other hand, fiscal decentralization might ensure the scal stability of the public sector by constraining Leviathan governments. Since the impact of decentralized government on fiscal outcomes is therefore ambiguous from a theoretical perspective, we explore this question empirically with a panel of 17 OECD countries over the 1975-2001 period. Our findings suggest that expenditure decentralization signicantly reduces public indebtedness, whereas tax decentralization and vertical fiscal imbalances are insignicant.
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TL;DR: In this article, the generalized method of moments (GMM) estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
Abstract: This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.
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TL;DR: In this paper, a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables is presented. But the authors do not consider models with predetermined variables that have constant correlation with the effects.
Abstract: This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations
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TL;DR: In the United Kingdom, both Scot- land and Wales have opted under the Blair government for their own regional parliaments and in Italy the movement toward decentralization has gone so far as to encompass a serious proposal for the separation of the nation into two in-dependent countries as mentioned in this paper.
Abstract: vogue. Both in the industrialized and in the developing world, nations are turning to devolution to improve the per- formance of their public sectors. In the United States, the central government has turned back significant portions of federal authority to the states for a wide range of major programs, including wel- fare, Medicaid, legal services, housing, and job training. The hope is that state and local governments, being closer to the people, will be more responsive to the particular preferences of their con- stituencies and will be able to find new and better ways to provide these ser- vices. In the United Kingdom, both Scot- land and Wales have opted under the Blair government for their own regional parliaments. And in Italy the movement toward decentralization has gone so far as to encompass a serious proposal for the separation of the nation into two in- dependent countries. In the developing world, we likewise see widespread inter- est in fiscal decentralization with the ob- jective of breaking the grip of central planning that, in the view of many, has failed to bring these nations onto a path of self-sustaining growth. But the proper goal of restructuring the public sector cannot simply be de- centralization. The public sector in nearly all countries consists of several different levels. The basic issue is one of aligning responsibilities and fiscal in- struments with the proper levels of gov- ernment. As Alexis de Toqueville ob- served more than a centuty ago, "The federal system was created with the in- tention of combining the different ad- vantages which result from the magni- tude and the littleness of nations" (1980, v. I, p. 163). But to realize these "dif- ferent advantages," we need to under- stand which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government. This is the sub- ject matter of fiscal federalism. As a subfield of public finance, fiscal feder- alism addresses the vertical structure of the public sector. It explores, both in normative and positive terms, the roles of the different levels of government and the ways in which they relate to one another through such instruments as intergovernmental grants.2
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TL;DR: Buchanan and Brennan's "The Power to Tax" as mentioned in this paper was a much-needed answer to the tax revolts sweeping across the United States in the early 1980s.
Abstract: Commenting on his collaboration with Geoffrey Brennan on "The Power to Tax", James M. Buchanan says that the book is "demonstrable proof of the value of genuine research collaboration across national-cultural boundaries." Buchanan goes on to say that "The Power to Tax" is informed by a single idea - the implications of a revenue-maximizing government." Originally published in 1980, "The Power to Tax" was a much-needed answer to the tax revolts sweeping across the United States. It was a much-needed answer as well in the academic circles of tax theory, where orthodox public finance models were clearly inadequate to the needs at hand. The public-choice approach to taxation which Buchanan had earlier elaborated stood in direct opposition to public-finance orthodoxy.What Buchanan and Brennan constructed in "The Power to Tax" was a middle ground between the two. As Brennan writes in the foreword, "The underlying motivating question was simple: Why not borrow the motivational assumptions standard in public-choice theory and put them together with assumptions about policy-maker discretion taken from public-finance orthodoxy?" The result was a controversial book - and a much misunderstood one as well. Looking back twenty years later, Brennan feels confirmed in the rightness of the theories he and Buchanan espoused, particularly in their unity with the public-choice tradition: "The insistence on motivational symmetry is a characteristic feature of the public choice approach, and it is in this dimension that "The Power to Tax" and the orthodox public-finance approach diverge."
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TL;DR: In this paper, a simple test of Granger (1969) non-causality for hetero- geneous panel data models is proposed, based on the individual Wald statistics of Granger non causality averaged across the cross-section units.
Abstract: This paper proposes a very simple test of Granger (1969) non-causality for hetero- geneous panel data models. Our test statistic is based on the individual Wald statistics of Granger non causality averaged across the cross-section units. First, this statistic is shown to converge sequentially to a standard normal distribution. Second, the semi- asymptotic distribution of the average statistic is characterized for a fixed T sample. A standardized statistic based on an approximation of the moments of Wald statistics is hence proposed. Third, Monte Carlo experiments show that our standardized panel statistics have very good small sample properties, even in the presence of cross-sectional dependence.
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