Trends of Fiscal Centralization: Portuguese Local Government Reform
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abstract
The crisis of the sovereign debt forced Portuguese government to reach out for joint financial help form the IMF (International Monetary Fund), EU (European Union) and ECB (European Central Bank). In the financial agreement terms, IMF/EU/ECB stressed the need of a major redefinition of the local government organization. Nowadays, Portuguese local government is structured in 308 municipalities and 4259 parishes both with elected officials and administrative, financial and patrimonial autonomy. So, Portuguese government was asked to present a consolidation plan to reorganize local entities enhancing service delivery, improve efficiency and reduce cost. The main argument used is that excessive territorial and fiscal fragmentation undermines efficiency.
This research seeks to measure the impact of territorial and fiscal fragmentation in local government spending. We begin by looking into Tiebout’s (1956) argument that an optimal level of local expenditures can be defined based on a consumer-voter preference towards public goods and taxation. Then we counterpoin with the opposite argument, used by international agencies, that, bought territorial and fiscal, centralization can produce economies of scale, reduce overlaps, control free riders and promote better accountability (Hendrick et al. 2011)
The main objective of the paper is to test the competitive hypothesis that fragmentation/centralization induces higher spending in local government. To test this hypothesis we use a quantitative approach collecting primary financial data assembled from all Portuguese local government. We defined as a dependent variable, the amount of money transferred to parishes in each local government. Then, we use administrative fragmentation index in local government as indicators to measure territorial and population level of fragmentation. With the results of the paper, we hope to contribute to some clarification in the literature about fragmentation and federalist strategies to improve financial sustainability.
