Who Honours the Rules of Federalism? Party System Nationalisation and Fiscal Performance

Abstract

This article explores the impact of decentralisation on countries’ fiscal outcomes paying attention to one aspect usually neglected in the literature: the relevance of local politics, proxied by party system nationalisation. Based on a wide sample of developed and developing countries over the period 1970–2011, our findings are threefold. First, both fiscal and political decentralisations have a virtuous effect on fiscal performance, improving general government primary balances. Second, there is no strong evidence that nationalisation by itself enhances national fiscal outcomes. Nevertheless, when fiscal decentralisation is coupled with a certain level of nationalisation, the former improves government fiscal balances. However, when nationalisation of party systems is extremely weak, all the disciplining effects of decentralisation tend to disappear.