Grants Versus Tax Sharing : The Extent of Central Government Control

Throughout the OECD, regional and local governments typically rely heavily upon transfers from their national governments to finance their day to day expenditures. While grants remain the most popular method of transferring resources from the centre to the sub-centre, the potential for greater use of tax sharing agreements has received considerable attention in recent years. A key aspect of this debate and of the fiscal decentralisation literature more generally, is the attempt to strike a balance between on the one hand, sub-central government freedom and accountability and on the other, macroeconomic stability. This paper assesses the relative ability of the centre to control national fiscal policy in an effort to re-balance the budget during periods of fiscal crisis. We compare and contrast the resources available to central governments when faced with a need to consolidate across various decentralisation regimes, demonstrating that, contrary to established thinking, grants and tax sharing imply two very different levels of central authority