Fiscal decentralisation and local government efficiency: Does relative deprivation matter?

Abstract

Fiscal decentralisation arguably improves government efficiency because it enhances responsiveness to local policy issues and incentivises fiscal discipline. However, critics suggest that central control over local spending is necessary to equalise fiscal outcomes between prosperous and deprived areas. Using a two-stage analysis, we investigate the validity of these arguments by analysing the separate and combined effects of fiscal decentralisation and socio-economic deprivation on the productive efficiency of English local governments during 2002?2008. The results suggest that decentralisation is positively related to productive efficiency and that there is a negative relationship between socio-economic deprivation and efficiency. Further analysis reveals that deprivation weakens the positive decentralisation-efficiency relationship, calling into question simplistic proposals for fiscal decentralisation.