Fiscal decentralization and inequality: The case of Spain

Abstract

What are the distributional effects of power allocations between different levels of government in a country? This article examines whether having regions with more fiscal authority is significantly associated with higher national economic inequality in a country. The literature has long established the positive link between decentralized governance structures and varying levels of redistribution within a country. Redistribution is channel through which governments tackle inequality, and if redistribution is asymmetric across sub-national units, this is expected to increase inequality. Yet, there is a gap in the literature that systematically links these three components: decentralized governance, redistribution and economic inequality. By focusing on the fiscal aspect of decentralization, this article provides the theory and the causal mechanism for understanding why the decentralization levels of governance in a country should matter for income inequality. Using data measured along different components of regional authority, such as policy scope, fiscal autonomy and fiscal control, it explains why fiscal decentralization is expected to increase inequality, while predicting that the co-sharing of fiscal power between the regions and central government will to lead to lower inequality. The article tests this hypothesis with a case study on Spain.