Vertical Fiscal Imbalance as an Integral Part of the Local Public Sector Financing: Its Determinants in the Case of New and Old European Union Member
Vertical Fiscal Imbalance as an Integral Part of the Local Public Sector Financing: Its Determinants in the Case of New and Old European Union Member

Summary/Abstract: Fiscal decentralization brings certain economic benefits, but also meets certain inconveniences. If the process of decentralization is realized in the mode, that the decentralization of expenditure and decentralization of revenue are divided, the success of its implementation is endangered. Excessive expenditure decentralization without adequate decentralization of revenues creates a gap, which is under the soft- budget constraints conditions completed by intergovernmental transfers. Intergovernmental transfers present a move of public financial resources from central level of government to local levels of government creating vertical fiscal imbalance. The theory is not clear about the eligibility of soft- budget constraints and vertical fiscal imbalance. The economic reality supports their existence and considers them as an integral part of local resources. In this paper vertical fiscal imbalances in the EU countries are analyzed. Using the panel regression with time effects for a sample of new and old EU member states, determinants of vertical fiscal imbalance are identified. Significant negative effect of public deficit and revenue decentralization is observed in all two samples. The impact of time effects differs according to the sample. This paper is published within the project VEGA no.1/0559/16.

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