Impact of fiscal institutions on public finances in the European Union: Review of evidence in the empirical literature

Gorčák, Martin; Šaroch, Stanislav Article Impact of fiscal institutions on public finances in the European Union: Review of evidence in the empirical literature Review of Economic Perspectives Provided in Cooperation with: Masaryk University, Faculty of Economics and Administration Suggested Citation: Gorčák, Martin; Šaroch, Stanislav (2021) : Impact of fiscal institutions on public finances in the European Union: Review of evidence in the empirical literature, Review of Economic Perspectives, ISSN 1804-1663, De Gruyter, Warsaw, Vol. 21, Iss. 2, pp. 215-232, https://doi.org/10.2478/revecp-2021-0010 This Version is available at: https://hdl.handle.net/10419/249947 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Impact of fiscal institutions on public finances in the European Union: Review of evidence in the empirical literature Martin Gorčák, Stanislav Šaroch 1 Abstract: This paper examines the impact of budgetary institutions on public finances in the European Union on the basis of a critical survey of the relevant theoretical and empirical literature. In general, the authors find that fiscal institutions (namely fiscal rules) have successfully contributed to greater fiscal sustainability, reduced procyclicality of fiscal policies within the EU, and increased national ownership of fiscal rules by strengthening national fiscal frameworks. A fiscal reaction function was one of the widely used methods to determine the principal variables affecting fiscal outcomes. Some authors used cyclically-adjusted fiscal outcomes as the dependent variable representing the discretionary fiscal policy-making whereas others put emphasis on other fiscal outcomes. The samples of countries covered mostly the EU Member States, representing rather homogenous samples in the context of common EU fiscal framework. Institutional aspects used as independent variables differed significantly among authors and some could be added for future research. Based on the literature survey, several recommendations were made for fiscal policy-making. Keywords: Deficit Bias, European Fiscal Framework, Fiscal Governance, Fiscal Institutions, Fiscal Outcomes, Fiscal Rules, Stability and Growth Pact JEL Classification: E61, E62, H61, H62, H63 Received: 6 October 2020 / Accepted: 19 April 2021 / Sent for Publication: 8 June 2021 Introduction In the Economic and Monetary Union (EMU), monetary policy has been conducted at the supranational level by the European Central Bank (ECB) to address the time-incon- sistency problem and to ensure price stability in a credible manner (Kydland and Prescott, 1977; Barro and Gordon, 1983; Rogoff, 1985). Fiscal policies, on the other hand, have remained a matter of the national level. The last economic and financial crisis proved that fiscal policies of the EU Member States are a matter of common interest in the EMU. Each country of the European Union (EU), and especially in the euro area, depends on one another in terms of economic growth and inter alia their ability to absorb economic 1 Faculty of International Relations, Prague University of Economics and Business, Prague, Czech Republic, [email protected], [email protected] Review of Economic Perspectives 216 shocks. Generally, in currency unions, the consequences of deficit bias can be reinforced through negative spillover effects (Allen and Gale, 2000) and upward pressures on interest rates (Beetsma and Bovenberg, 1998). Furthermore, it is the responsibility of the Member States to ensure proper coordination of fiscal policies as well as the sustainability of public finances (including a sound level of public debt). The fiscal automatic stabilisers to cushion economic shocks should be primarily attributed to the national level. Moreover, the Member States ought to assume an appropriate fiscal stance in order to avoid procyclicality of fiscal policies (European Commission, 2018a). Overall, responsible fiscal policies should be conducted in full respect of the European fiscal framework. This framework, designed to contain public sector deficits and reduce public sector debts in the EU Member States, is integrated inter alia in the Treaty on the Functioning of the European Union (TFEU) and in the Stability and Growth Pact (SGP). These two make essential parts of the current European fiscal framework. The legislative acts integrated into the “Six-Pack” and the “Two-Pack”, and the Treaty on Stability, Coordination and Governance in the EMU (TSCG, often referred to as the Fiscal Compact) have brought several adjustments in the fiscal framework. Its aim is to promote sound public finances and ensure the sustainability of public finances in the Member States. The emphasis is also put on enforcement mechanisms and national ownership of fiscal rules. Although the same fiscal framework is designed for all Member States, the application of fiscal rules and fiscal targets varies across countries (see for instance Beetsma and Larch, 2019; Hallerberg et al., 2009; Majone, 2014; Pisani-Ferry, 2011). In practice, the level of deficit and debt often exceeded the TFEU reference values, especially after the outbreak of the global financial crisis. While all but three Member States registered excessive deficits in 2010 2 , all of them respected the deficit criterion in 2018 (except for Cyprus due to one-off support measures related to the Cyprus Cooperative Bank sale). However, such correction of excessive deficits resulted mainly from favourable macroeconomic conditions, revenue windfalls and lower interest rates rather than from fiscal adjustment efforts. Such development was similar to the evolution of the public debt: whereas the debt-ratios of the EU and euro area increased to almost 90 % of GDP between 2009 and 2014, it started to diminish in 2015 in the context of higher primary balances, economic growth and historically low interest rates 3 . Furthermore, the development of public debt has diverged significantly among the Member States since the last financial crisis. In 2019, about half of the Member States registered debt levels below 60 % of GDP while in some other EU countries debt levels remained around or above 100 % of GDP. Such development in public finances suggests that the application of fiscal rules did not make a material difference in cases where enforcement of fiscal discipline was needed the most. (EC, 2020a) The Covid-19 pandemic puts the application of the current fiscal framework in an unprecedented context full of uncertainties and puts the policy-makers in an extremely difficult position, regarding the provision of specific and credible fiscal policy orientation. Since March 2020, the general escape clause (EC, 2020b), embedded in the SGP since 2 At the aggregate EU level, the headline deficit exceeded 6 % of GDP in 2009–2010. 3 In general, decrease in debt-to-GDP ratio after an economic crisis may be supported with inflation or politically feasible debt restructuring. Volume 21, Issue 2, 2021 217 2011, has allowed the EU Member States to temporarily reorientate their fiscal policies in the light of tackling the health and economic consequences of the pandemic as the number one priority. As a result of the functioning of automatic stabilisers and the sizeable discretionary fiscal measures introduced to tackle the health crisis and mitigate the economic and social impact of the pandemic, the headline deficit is forecast to increase at EU and euro area level respectively to 8.4 and 8.8 % of GDP. The impact of the pandemic is expected to be much higher than the one of the financial crisis (EC, 2021, 2020c). In the period of 2020–2022, the deficits are expected to remain (well) above 3 % of GDP in more than half of the EU Member States. All of them (except for Bulgaria) are set to break the deficit criterion in 2020. In 2022, a deficit above the reference value is estimated for almost two thirds of the Member States. The debt ratios are definitely set to rise as well due to the covid-crisis in the EU and euro area (to almost 94 % and 102 % of GDP respectively). In the period of 2020–2022, the debt is expected to be lower than 60 % of GDP only in about 10 EU countries, while in the case of seven Member States it should (dramatically) exceed 100 % of GDP. Primary deficit is expected to be the key driver of such increases in debt (EC, 2021). Despite the above-mentioned forecasts of the deterioration in public finances, the escape clause neither suspends the procedures of the SGP, nor does it mean that fiscal rules will cease to exist after the pandemic. Without pre-empting the size of future fiscal adjustments, the increased public deficits and debts across the Member States will have to be dealt with after the pandemic, thus the significance of institutional aspects of fiscal surveillance is still worth looking into. The growing academic and professional interest in the fiscal institutions in the EU has been evident for more than three decades. In this paper, fiscal institutions mean different institutional aspects of fiscal surveillance in the EU, namely fiscal rules, budgetary procedures, independent fiscal institutions or medium-term budgetary frameworks, as assumed by EC (2014). There is a substantial amount of research on the fiscal rules and forms of governance in the EU (such as Kopits and Symansky, 1998; Annett, 2006; Afonso and Hauptmeier, 2009; Hallerberg et al., 2004; Beetsma and Larch, 2019; Larch et al., 2020 or EC, 2020d). Previous work related to their impact on the public finances in the EU is also relevant to this paper. The aim of this paper is to provide an overview of empirical studies mainly on the fiscal rules and forms of governance and their impact on public finances by conducting a critical survey of literature covering a different variety of countries (from 14 to 47) and time periods (from 14 to 48 years). The questions relevant to this article are as follows: What is the among-authors-agreed influence of the fiscal rules and forms of governance on fiscal outcomes in the EU? What could be the recommendations for the policymakers for conducting fiscal policies in the EMU? The first section provides an overview of the history of the European fiscal framework from its inception in 1997 until the application of the general escape clause in 2020. The second section reviews the rationale for the need of institutional aspects of fiscal surveillance. The third one provides an overview of the theoretical and empirical literature on fiscal rules and fiscal governance and their link to fiscal outcomes. It also discusses methodological approaches to estimating the impact of institutional aspects on fiscal outcomes. Review of Economic Perspectives 218 The last section provides recommendations for fiscal policy-making derived from the literature review. Evolution of the EU framework of fiscal surveillance: a brief overview The macroeconomic rationale for adopting the EU fiscal rules was that the macroeconomic stability in a single monetary area would be smoothly maintained in the environment of low and stable inflation and sound public finances. While the monetary policy in the euro area has been held within the competence of the ECB as a centralized supranational institution, there was a lack of political agreement on centralizing the fiscal policy. This is why the commonly agreed EU fiscal rules (known as the Stability and Growth Pact) have been adopted to limit the fiscal policy-making of the EU countries and maintain long-term fiscal sustainability. Such attempts took the form of addressing gross policy errors (i.e. the budgetary deficit exceeding 3 % of GDP or public debt higher than 60 % of GDP which is not sufficiently diminishing towards its reference value). The lack of flexibility (including an absence of an escape clause) and strict orientation on headline deficit took their toll in the early 2000s: larger EU countries (in terms of population, namely Germany and France, supported by Italy) expressed their discontent with such strict framework in November 2003, which eventually led to its first revision in 2005. The lack of compliance occurred contrary to the expectations at the inception of the SGP. Therefore, the SGP was reoriented from the headline to structural deficit in order to better take into account country-specific characteristics. In 2011, the “Six-Pack” (i.e. five regulations and one directive) was adopted, followed by the “Two-Pack” in 2013 (i.e. two regulations applicable to euro area countries). In sum, these successive reforms have changed the fiscal framework in the following aspects (Beetsma and Larch, 2019): first, the fiscal rules have gained a great deal of flexibility, considering the economic rationale and the need for economic stabilisation, mostly at the expense of fiscal sustainability. Second, the fiscal surveillance eventually turned to a tighter set of surveillance steps (largely embedded in the European Semester), having also led to a complex set of sanctions that have almost never been used in practice 4 . The tightening of surveillance was designed to compensate for the increased flexibility of fiscal rules. Third, the Commission has acquired competences in the fiscal surveillance process, turning fiscal surveillance rounds often into the unilateral and rather political application of fiscal rules. And fourth, the “Six-Pack” and “Two-Pack” reforms (together with the TSCG) led to requirements for national ownership of fiscal surveillance, inter alia through national numerical fiscal rules and independent fiscal councils, which were designed, in general, to provide an independent assessment of fiscal policy-making. One would assume that the current fiscal framework is so 4 In 2012, part of commitments from the Cohesion Fund was suspended for Hungary. Volume 21, Issue 2, 2021 219 complicated that only a few would understand the whole set of rules, together with all the exceptions embedded in it 5 . In February 2020, the Commission published the Economic Governance Review (EC, 2020a), assessing the rules embedded in the “Six-Pack” and “Two-Pack.” This was supposed to be followed by a consultation process with stakeholders, and an overall assessment of the need for changing the relevant EU secondary legislation. Nevertheless, the outburst of the pandemic, which led to activating the general escape clause (the SGP´s element of flexibility for a case of a severe economic downturn in the EU or the euro area as a whole), led to a postponement of the consultation process. The above-mentioned escape clause does not mean suspension of procedures under the SGP, and after being deactivated, the fully-fledged application of fiscal rules will be needed in the context of future fiscal consolidation. The significance of institutional aspects is therefore worth looking into, taking into account their rationale explained in the following section. Rationale for fiscal institutions The current theoretical and empirical literature focuses on the reasons why fiscal institutions (like fiscal rules and forms of fiscal governance) are needed. In general, fiscal institutions have been designed to contain public sector deficits and reduce public sector debts in the EU Member States. The rationale of fiscal rules has been explained by several authors. As noted by Kopits and Symansky (1998, pp. 22), “The rationale for fiscal policy rules (mainly in the form of various balanced-budget rules borrowing rules, and debt rules) rests primarily on the need for macroeconomic stability, support of other financial policies, long-term sustainability, reduction of negative spillovers, and overall policy credibility.” Although most of these objectives could be met with discretionary fiscal measures, well-designed fiscal policy rules may be successful in countering political pressures on fiscal policymaking. These rules should be helpful in correcting the tendency of democratically elected governments to run budget deficits and to accumulate public debts. In other words, the fiscal policy framework should at least limit the governmentsˈ built-in bias toward excessive deficit and debt. In addition, fiscal rules should support countercyclical fiscal policies. They should be pursued even in times of economic depressions, however, the question is whether that should also apply to countries in precarious fiscal conditions, i.e. with public debts of 60 % of GDP and government deficits at 3 % of GDP. Such countries would need more time to converge towards the relevant fiscal rules, without loosening the existing ones (Tanzi, 2005). Kydland and Prescott (1977) claim that discretionary fiscal policy is not appropriate in economic planning. The decision-making of economic agents depends on their expectations regarding future policy, which are unchanged regardless of the political plans chosen. The authors found that active stabilization steps could lead to destabilization of the economy. The inconsistency between discretionary policy steps and economic agents' 5 The fiscal question: What next for the EU’s fiscal rules? In: The Economist [online]. 31 October 2020 [Accessed 27 November 2020]. Available from: https://www.economist.com/finance-and- economics/2020/10/31/what-next-for-the-eus-fiscal-rules. Review of Economic Perspectives 220 behaviour suggests that fiscal policy-makers should adhere to commonly agreed rules instead of pursuing discretionary policies. Blinder (1997) deals with the issue of the political nature of the government, specifically in the US. The source of separation between the elected representatives from the US population is the votersˈ feeling that the governance process has become too political, and that the politicians do not focus much on solving problems. The biggest problem here is the excessive commitment of the government to those with political influence, often at the cost of public interest. However, the author does not see a solution in depoliticizing the government but in the separation of aspects to be dealt with by the government, and those to be left to the technical level. For instance, certain administrative bodies and institutions could be responsible for economic policy-making at the technical level, such as the Federal Reserve (Fed). However, Hardin (1968) points out that some problems cannot be solved at the technical level, especially in the context of strategic games (e.g. the armament of two political powers). In this case, technical solutions could even aggravate the problem. A large body of theoretical and empirical literature offers further explanation for the rationale of fiscal rules, for example, Hallerberg et al. (2004), Annett (2006), Velasco (1999), Hallerberg and von Hagen (1999). First, the essential idea of the institutional approach to public budgeting is to recognize the common pool problem. The point is that government spending is targeted at a certain group of society even though such spending is financed by all tax-payers. Therefore, only the individuals benefitting from a certain policy programme realize the full benefit of such programme despite the costs being shared by the whole population of a country. Moreover, democratically elected politicians, representing a large variety of voters with diverging interests, have no incentives to constrain the government spending. These situations are typical for modern democratic states, where policymakers are generally tempted to excessive spending for the sake of the electors they represent and those who benefit from the public policy programmes as they do not bear its entire costs. This makes an externality problem in a form of excessive deficit and debt, and delayed stabilisation (Velasco, 1999; Hallerberg et al., 2004; Annett, 2006). Furthermore, as explained by Annett (2006), the general public tends to be less myopic than politicians, especially if the current politicians follow their own interest of being reelected rather than dealing with the effects of accumulating debt in a long-term horizon. This means that the tendency to loosen fiscal policy may result in a deficit bias. Moreover, voters may not acquire a full understanding of the intertemporal budget constraint (e.g. the fiscal impact of ageing). In the European environment, the tendencies of excessive spending and running large deficits grow stronger with the number of representatives with autonomous spending decisions, who pursue their individual spending interests. This leads to fragmentation in fiscal policy-making as a result of a coordination failure (Hallerberg et al., 2004). Annett (2006) confirms that, in general, deficit biases may be stronger in a monetary union: since the exchange rate risk (and therefore interest premium risk) is no longer relevant, fiscal discipline is likely to be less stringent. The common pool problem is more profound in a monetary union where failing to follow such discipline could lead to inflationary pressures and increasing interest rates, all of which would get the common monetary policy under pressure. Volume 21, Issue 2, 2021 221 A wide range of literature shows many other factors strengthening the deficit bias in advanced economies, like Annett (2006), Annett, (2002), Kontopoulos and Perotti (1999), Grilli et al. (1991), de Haan et al. (1999), Roubini and Sachs (1989), or Alesina and Perotti, (1995). These include inter alia coalition governments, short durability of governments, proportional electoral systems, a high number of spending ministers, or electoral uncertainty. The electoral system associated with proportional representation especially is a significant feature leading to fragmented governments as well as the abovementioned common pool problem. This could be exacerbated by fragile budgetary institutions (Annett, 2006). Fiscal institutions and their impact on public finances in the EU Fiscal rules and their impact on public finances in the EU The existing literature deals with the question of overcoming deficit biases and the issue of high public debt, for example by adopting formal fiscal rules in order to constrain the discretionary fiscal policy. Results of numerous studies explain the effect of fiscal rules on fiscal outcomes, including those in the EU countries. Firstly, the positive effect of fiscal rules on fiscal positions, i.e. on the budget balance and on the debt ratio, may be pointed out. According to EC (2018b), the fiscal framework seems to have contributed to greater sustainability of fiscal positions. Their research involves monitoring the evolution of the EU Member Statesˈ average debt ratio from 1985 to 2017, taking into account various factors of debt ratio dynamics (i.e. cyclically-adjusted primary balance, cyclical budget component, snowball effect and stock-flow adjustments). The average debt ratio in the EU grew more slowly than in the US or Japan, mainly due to a more prudent implementation of discretionary fiscal policies. Until 2007, public debt for the EU average increased to around 60 % of GDP (compared to around 65 % of GDP in the US and 185 % of GDP in Japan). In 2017, the debt ratio stabilized at around 83 % of GDP (compared to around 110 % of GDP in the US and 204 % of GDP in Japan). Such differences in debt development were particularly evident after the introduction of the SGP. The key factor contributing to the reduction in the debt ratio was the tightened discretionary fiscal policy, measured with cyclically-adjusted primary balance. Next, EC (2018b) describes debt dynamics at the EU Member States level, while comparing the debt level between 2007 and 2017. Despite the growth period following the Great Recession, debt levels were mostly close to their historic peaks, especially in highly indebted countries like Italy, Spain, France or the United Kingdom. Nonetheless, debt developments and their drivers remained highly country-specific. Apart from that, a comparison of key fiscal outcome variables before and after the introduction of a certain EU fiscal rule was carried out (e.g. comparison of debt reduction dynamics before and after 2011, as debt reduction benchmark was introduced in 2011). EC (2018b) proves that the Member States with large budgetary deficits significantly reduced their deficits after the introduction of the deficit reference value (3 % of GDP), with the exception of the Great Recession. Despite the fact that 24 Member States fell into the Excessive Deficit Procedure (EDP), Spain was the only one to remain in the EDP in 2018. Furthermore, EU Member States also advanced significantly in terms of structural balances towards their mediumterm budgetary objectives (MTOs) after having reformed the SGP in 2011. In addition, the evolution of public spending seems to be better controlled through the expenditure Review of Economic Perspectives 222 benchmark which was also introduced in the same year. All the above-mentioned elements indicate that the European fiscal framework seems to have contributed to building more prudent fiscal policies in the EU Member States, but EC (2018b) carried out a preliminary research, and a more thorough analysis would be needed to establish a causal relationship. Casselli et al. (2018) present evidence of well-designed fiscal rules constraining excessive deficit bias. Their research is oriented on 33 EU Member States and candidate countries covering the period from 1970 to 2016, and focused on the causal link between the adoption of a 3 % general government deficit ceiling and the level of deficits. In terms of causality, a simple comparison between countries with the above-mentioned reference value and those without it would be insufficient. This is the reason why they constructed a counterfactual sample considering the alternative assumption that the EU Member States had not adopted such fiscal rule. To construct such a sample, they used a treatment effects methodology, giving more weight to observations in the “no-fiscal rule” group with a greater probability of adopting the rule. These steps led to creating a counterfactual sample with qualities similar to the original group with the fiscal rule. They concluded that better designed fiscal rules tend to lead to budget balance. “Rules seem to affect countries with low and high fiscal balances in opposite directions, suggesting that they exert a “magnet effect”” (Caselli et al., 2018, pp. 28). This “magnet effect” shows a difference between countries that adopted the 3% deficit ceiling and those without such a rule. About 20 % of the original sample was found near the 3 % deficit ceiling in comparison to the counterfactual sample. In addition, 22 out of 28 EU Member States showed that their budgetary position improved due to the deficit rule. The authors come to the conclusion that a higher concentration of the distribution of government deficits has been found in the sample of countries with the rule. In other words, there are few countries with very high deficits and few countries with very high surpluses. Afonso and Hauptmeier (2009) used a panel data analysis to assess the factors of governmentˈs fiscal behaviour for the EU-27 Member States in the period from 1990 to 2005. Their method of panel regressions took the form of fiscal reaction functions, focusing on two dependent variables: primary balance and primary spending. They found out that the EMU and SGP arrangements have a statistically favourable impact on fiscal positions, which could be explained by the Member Statesˈ steps to comply with the European fiscal framework. Independent variables covered inter alia EMU and SGP dummies, as well as variables for fiscal rules (i.e. general government fiscal rule, central government fiscal rule, sub-national government fiscal rule and budget balance fiscal rule). On the other hand, the authors have not proved any statistically significant impact of EMU and SGP arrangements on primary spending. They also come to the conclusion that in the case of the debt-to-GDP ratio below 80 %, a stronger overall fiscal rule helps to increase the primary budget balance. They note that apart from fiscal rules, a lower degree of public spending decentralization is another factor that positively contributes to greater responsiveness of primary balances to the debt-to-GDP ratio. Kopits and Symansky (1998) pointed out the great diversity of fiscal rules across countries: Some rules tended to be useful, some were only complementary to the existing discretionary measures, and some were almost ineffective in terms of the budget deficit and debt ratio. Their research points to the mixed effects of fiscal rules. For example, the convergence of budgetary deficits towards the EU reference value (3 % of GDP) seems Volume 21, Issue 2, 2021 229 The rules have also helped to contain the public debt at a reasonable level. A fiscal reaction function is one of the widely used methods to determine the principal variables affecting fiscal outcomes, even though some authors use cyclically-adjusted fiscal outcomes (e.g. primary cyclically-adjusted balance) as the dependent variable whereas others put emphasis on other fiscal outcomes (like the change of the debt-to-GDP ratio). The authors use a different variety of countries (from 14 to 47 countries) and time periods (from 14 to 48 years) in their research. The samples of countries covered mostly the EU Member States, representing rather homogenous samples that are expected for easier comparison and analysis since the EU Member States are bound by common rules embedded in the EU fiscal framework. Other authors used a sample of countries with rather heterogeneous economic and institutional structures. Institutional aspects used as independent variables differ significantly among authors and some could be added for future research, like dummy variables of “Two Pack” for the euro-area countries. When it comes to the forms of fiscal governance, it has been proved that states with a commitment institutional approach tend to effectively limit politically-motivated steps in policymaking. The delegation approach was effective especially before the Maastricht period. The following recommendations could be taken into account by the EU Member States: (i) full respect of the commonly agreed fiscal framework, (ii) rebuilding fiscal buffers in the context of preparation for the future economic downturn, (iii) avoiding procyclical fiscal policies, (iv) emphasis on the national ownership of fiscal rules. Nonetheless, in the context of crises (such as the Covid-19 crisis), escape clauses and flexibility embedded in the fiscal rules need to be considered. Taking into account the expected increase in headline deficits and public debt ratios across the Member States in 2020–2022, the right balance will have to be sought between the need for fiscal consolidation and fiscal support for economic recovery. After all, the aim of fiscal surveillance requirements (including the reference values for deficit and debt) should not be solely their formal compliance, but mainly prudent fiscal policy leading to building fiscal buffers in good economic times. In this respect, due consistency of recovery and resilience plans with fiscal requirements (implicitly stemming from the RRF regulation) may strengthen political ownership for successful funding from the Recovery and Resilience Facility. Disclosure statement: No potential conflict of interest was reported by the authors. References AFONSO, A., HAUPTMEIER, S., (2009). Fiscal behaviour in the European Union: rules, fiscal decentralization and government indebtedness. 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