Does Fiscal Decentralisation Foster Regional Convergence?

Across the OECD, GDP per capita is converging. In contrast, regional disparities – or differences in GDPper capita across jurisdictions – are rising, mainly as a result of widening productivity differences. Fiscaldecentralisation could help reduce them again. According to new OECD research, assigning more ownsourcerevenue to sub-national governments dampens regional GDP disparities and underpins regionalconvergence. In more decentralised settings, catching-up regions appear to adopt policy innovations morerapidly and their policy innovations have a stronger impact. Conversely, intergovernmental grants tend tofuel disparities, probably because they discourage lagging regions to develop their economic and fiscalbase. However, when replacing intergovernmental transfers by own-source revenue, lower disparities inregional output may come at the cost of larger disparities in regional income and more unequal publicservice standards. Reforms to intergovernmental fiscal frameworks should therefore be two-pronged: a risein sub-national own-source revenue should be paired with a re-design of intergovernmental transfers andfiscal equalisation, in order to make all jurisdictions enjoy the benefits of more sub-central fiscal power.