In the last two decades, public sector debt has shown a rising trend in relation to GDP in a wide range of countries, both federal and unitary. These increases have reflected high levels of real interest rates on the debt and, in a number of countries, a lack of fiscal discipline, as witnessed by primary deficits in the general government accounts. While these deficits have been recorded most frequently at the central government level—sometimes because of, inter alia, gap-filling transfers to subnational governments—in several countries, especially but not exclusively federations, deficits and debt have emerged and risen over time at the state or provincial and local levels as well.
The growth of subnational public debt is frequently a symptom of an inappropriate design of intergovernmental fiscal relations in the country in question, involving, for example, large vertical or horizontal imbalances or a system of intergovernmental transfers lacking transparent criteria and conducive to ad hoc bargaining or ex post gap filling. A question which arises in this context, and which this chapter attempts to shed some light on, is to what extent the growth of subnational debt may be promoted, or at least facilitated, by a lack of controls and limits on subnational government borrowing.
This chapter reviews a broad range of international experiences with such controls, drawing in particular, on the case studies presented in Chapters 8 through 28.