The Stimulating Effect of Fiscal Equalization Grants on Local Spending: an Estimation using Municipal Data in France

Résumé 0

Fiscal equalization between local governments is now a constitutional requirement since 2003 and there is some consensus on its principle. However, it is frequently criticized. First, its efficiency might be too low in reducing inequalities in tax capacities and fiscal needs. Second, it might be complex in its operating methods. Third, it might even be counter-productive in terms of a better control of local expenditures. Yet, the French legislator seeks to decrease the rise in local governments’ spending, first in 2014-2017 by reducing its grants, and then (2018-2022) in enforcing a cap in the increase in current spending. This paper gives an econometric evaluation of the elasticity of municipal spending to equalization grants. Results show that this elasticity is low, and lower than the elasticity of spending to non-equalization grants, suggesting that equalization might be reinforced without calling into question the control over local spending. JEL Codes: H70, H71, H72, H73, H74.