Fiscal equalization and composition of subnational government spending: implications for regional convergence

Abebe Hailemariam, Ratbek Dzhumashev

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Abstract

This study examines the impact of fiscal equalization payments on the composition of government spending under endogenous growth theory. Analytical conjectures stemming from the model are tested empirically. As an instrumental variable for within-province variations in provinces’ equalization entitlements, we use plausibly exogenous variations in the grant eligibility rule for the Canadian fiscal equalization system. We find that fiscal equalization payments have a significant negative effect on the share of productive expenditures and a significant positive effect on the share of unproductive government expenditures. Furthermore, the results show that fiscal equalization lowers the speed of cross-regional convergence in real gross domestic product per worker.

Original languageEnglish
Pages (from-to)587-601
Number of pages15
JournalRegional Studies
Volume53
Issue number4
DOIs
Publication statusPublished - 2019

Keywords

  • endogenous growth
  • fiscal equalization
  • government spending
  • regional convergence

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