The effect of fiscal decentralisation on government size and expenditure composition: An empirical analysis

Fiscal decentralisation is the devolution of fiscal responsibilities such as expenditure, revenue and borrowing from central government authorities to sub-national government. The argument of controlling the size of the public sector and increasing the welfare of the society are the basis of countries' fiscal decentralization policies. Within the scope of this study, it is aimed to investigate the effect of fiscal decentralisation on the size and composition of expenditures at the general and local government level. For this purpose, it is possible to state that the concept of fiscal decentralisation, which is the subject of theoretical and empirical research, has faced many criticisms about its measurement. It is stated that fiscal decentralisation with only a single indicator or simple indexes causes information losses. Mismeasurement of fiscal decentralization or ignoring its multidimensionality causes the reliability of the empirical findings. In the scope of this study, simple and composite index for fiscal decentralization and indicators of fiscal decentralization are measured taking into these criticism of measurement. Two different empirical analyzes are applied by using the different indexes calculations. In the first empirical part of study, it is aimed to determine the location of 36 countries in fiscal decentralization policies with multidimensional statistical analysis techniques by Cluster Analysis and Multidimensional Scaling Analysis. As a result of the findings, it is noteworthy that there is a convergence between Nordic countries in unitary structure and federal countries with high public administration performance, whereas island countries with small surface area and low population are diverge from other countries. Addition to that, the transition countries are similar cluster due to the centralized structure and political process,while other EU countries are in the same cluster due to the "Principle of Subsidiarity", local government policies followed before the 2008 crisis, and asymmetric fiscal decentralization policies. In the second empirical part of the study, the effect of fiscal decentralization on the size of the public sector and the composition of expenditure is analyzed by using five-year average data for the years 1972-2019 on the size of the public sector at the general and local government level, and the hypotheses regarding the expenditure composition are analyzed by using three-year average data for the years 1990-2019 by Arellano and Bover (1995), Blundell and Bond (1998, 2000)'s Two-Stage System Generalized Moment Estimator Robust Standard Errors. As a result of the findings, while there is no significant relationship between fiscal decentralisation and the size of the public sector at the general level, although there is a positive and significant relationship between the size of the public sector at the local government level. As a result of the findings related to the expenditure composition, fiscal decentralization has a negative and significant relationship on the expenditures related to the welfare of the society such as education and health expenditures. This contradicts the fact that fiscal decentralization promoted by first-generation theorists leads to an increase in social welfare. It is found that while fiscal decentralisation has a negative and strong effect on social expenditures at the general government level, it has a positive but less explanatory effect at the local government level.