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Budget Rules, Fiscal Consolidation and Government Spending:Implications for Federal Transfers

Pinaki, Chakraborty (2008): Budget Rules, Fiscal Consolidation and Government Spending:Implications for Federal Transfers.

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Abstract

This paper examined the nature of fiscal consolidation during the era of rule based fiscal control in states and its implications for federal transfers. The analysis revealed that improvement in fiscal balance has been associated with increasing disparities in developmental spending across states. The econometric estimates in panel data also showed that Fiscal Responsibility Act not having any positive and significant impact on development spending when controlled for revenue effect of VAT and increased central devolution. The result seems robust, as this has been corroborated by the exploratory data analysis even when off budget spending is added with the per-capita development spending of the states. When we compared between social and economic services, the disparity in spending is sharper in social sector vis-à-vis economic services. Given this widening disparities in spending the paper emphasizes on the need for equalization grants and estimates the resources requirement for complete equalization of specific services based on the partial equalization of scheme of transfer proposed .

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