Measurements of Fiscal Imbalances in Romania

• Author: Elena Cigu
• Position: Alexandru Ioan Cuza' University of Iasi, Iasi, Romania
• Pages: 242-248

European Integration - Realities and Perspectives. Proceedings 2020

242

Measurements of Fiscal Imbalances in Romania

Elena Cigu1

Abstract: Subnational government inequalities are always a challenge for the countries all over the world, in

particular large ones, even are unitary states or federations. Romania has a unitary system, but decentralization

process and different level o f economic development of individual territorial units determine specific problems

resulting in fiscal gaps, both horizontal and vertical. The paper focuses in the first part on the review of the

literature regarding the measurement of the vertical and horizontal fiscal imbalances, and the second part will

measure fiscal imbalances in Romania counties based on methodologies identified in the first part. Despite

being a unitary country, Romania presents an in creasing of horizontal fiscal imbalance and high vertical fiscal

imbalances for 28 counties of 42. The paper can be considered a useful viewpoint in understanding the state of

fiscal imbalances in Romania.

Keywords: vertical fiscal imbalance; horizontal fiscal imbalance; fiscal gap; subnational government

inequalities; transfers

1. Introduction

The decentralization of public finances as a complex system determines the decentralization of the tax

authority and to create a financial equalization system because of different level of economic

development of individual administrative-territorial units. In this context, the problem of public

income redistribution emerges, both horizontal and vertical (Kowalik, 2016).

The goal of this paper is twofold, theoretical and empirical. Firstly, at theoretical level, we highlight

the state of knowledge of the literature regarding the measures applied for vertical and horizontal

fiscal imbalances. Secondly, assimilating the results of previous studies, I will measure fiscal

imbalances in Romania based on different methodologies and apply it in the case of Romanian

counties over the period of time 2005-2015. We pay particular attention to the methodologies

developed or used by Hunter (1974, 1977), Martinez-Vazquez and Boex (1999, 2001), Shankar and

Shah (2001), Schroeder and Smoke (2003), Bird (1993), Bird and Tarasov (2002, 2004), Cowell

(2011), Li and Xu (2008), and Kowalik (2015, 2016) to measure fiscal imbalances, both horizontal

and vertical. This paper contributes to creating a comprehensive view on fiscal imbalance and

inequalities in Romanian counties and to the best of our knowledge, this is the first study that

measuring fiscal imbalances using the methodologies developed or used in their research by Hunter

(1974, 1977), Martinez-Vazquez and Boex (1999, 2001), Shankar and Shah (2001), Schroeder and

Smoke (2003), Bird and Tarasov (2004) and Kowalik (2016).

The working hypothesis is there are imbalances between Romanian counties, both horizontal and

vertical, having a significant impact on subnational sustainable development.

1 “Alexandru Ioan Cuza” University of Iasi, Iasi, Romania, Address: 11 Carol I Blvd., 700506, Iaşi, România, Tel.: 0232 20

1000, Corresponding author: elena.chelaru@uaic.ro.