An econometric analysis of local fiscal response to revenue sharing in Turkey

In this paper 1 examine local fiscal response to revenue sharing in Turkey under two main headings: revenue response and expenditure response. Whether local revenue is responsive to revenue sharing is examined by using cross-section and time-series analyses. The results of the cross-section analysis are inconclusive. However, evidence based on the time trend of the tax-effort ratio indicates that tax effort is influenced by the institutional framework of property taxation. This finding implies that local revenue is not responsive to revenue sharing. Whether local expenditure is responsive to revenue sharing is examined by using cross-section, time-series, and panel-data analyses. The results show that there is a strong positive relationship between the revenue sharing and expenditure trends. The Granger causality test indicates that revenue sharing drives expenditure, and this shows the existence of the circularity problem. These findings imply that local expenditure is responsive to revenue sharing.