The determinants of the growth of the public sector have drawn significant attention by researchers during the last decades of theoretical and econometric developments with increasing focus on the effects of fiscal federalism in recent literature. However, empirical evidence regarding the determinants and the appropriate theoretical approaches is ambivalent at best, depending on the choice of countries, on the employed econometric approaches, and on the data bases (time series, cross sectional data) used.

While cross country studies are dependent on available aggregate data in international financial statistics such as Eurostat, national financial statistics in provide more detailed data on the revenue and expenditure structure and on intergovernmental fiscal relations for a long period.

The objective of the paper is to test whether and to what extent fiscal decentralization and sub-national autonomy contributes to public sector growth, using more accurate measures on fiscal federalism for the case of.

Data and methods

In the first part, the paper briefly reviews some theoretical arguments on fiscal decentralization (such as Tiebout, Baumol and others) and presents existing econometric evidence on the determinants of public sector growth for.

For exploring public sector growth, we build up time series from 1956 to 2007, described in the second part of the paper, consisting of data on the central government and on sub-national bodies based on definitions of the European System of National Accounts (1995). Sub-national governmental bodies in include two levels, state and local government. Specifically, we account for a number of different aspects and potential variables measuring fiscal decentralization and fiscal autonomy of sub-national bodies more accurately:

-          consolidation within and between the national and sub-national level,

-          commonly used measures of fiscal decentralization (sub-national shares of total revenue and expenditure)

-          shared taxes and grants distributed by the Austrian Revenue Sharing System,

-          own source revenues under the responsibility of sub-national bodies,

-          transfers received by sub-national bodies and measures of fiscal vertical imbalance, and

-          fiscal, legal and political metadata.

Results

The empirical results of this paper suggest that the commonly hypothesized determinants of the ratio of total government expenditure to GDP may bear some explanatory power for Austrian fiscal policies. Government expenditures seem to follow a quadratic function with increases of the size of the public sector until about 2000, expenditures are also financed by budget deficits (increasing public debt), and react to active fiscal policies in terms of influencing the unemployment ratio. Fiscal decentralization such as the share of sub-national expenditure to total government expenditure, or vertical imbalances, reduce the growth of total government expenditure. At first sight, it seems that fiscal decentralization has a dampening effect on total government expenditure, thus corroborating the hypothesis of the efficiency of a federal system. In our paper, we discuss these results from a theoretical and empirical viewpoint, and also account for the efficiency effects of earmarked intergovernmental transfers and grants which seem to introduce efficient and effective fulfilment of public tasks at the sub-national level.