How services and spending responsibilities are allocated between central and subnational governments varies significantly across countries and is largely influenced by whether a country is organised as a federal or unitary state. Many government functions require collaboration and shared financing across levels of government. Subnational governments are often seen as more adept than central governments at understanding local requirements and more able to effectively customise the delivery of public services to meet peoples’ needs. Accordingly, understanding the distribution of governmental expenditure at subnational levels is key to ensuring the effective execution of public policies.
In 2021, on average, central governments in Latin American and Caribbean (LAC) countries were responsible for 62.5% of total public expenditure, significantly more than the OECD average of 45.2%. This indicates greater centralisation of fiscal responsibilities in the LAC region compared to OECD countries. The most centralised LAC countries in terms of the share of expenditure by central government were Chile (89.4%), Paraguay (78.9%) and El Salvador (78.6%). In contrast, in Mexico, a country with a federal system, central government expenditure was 41.3%, closer to the OECD average, indicating a more balanced distribution of fiscal responsibilities. While there are exceptions, like Mexico, the overall trend in the LAC region is to have spending powers more focused in central governments than subnational governments, compared to OECD countries (Figure 11.5).
Between 2019 and 2021, expenditure patterns rebalanced slightly towards the centre among LAC countries. Central governments’ share of expenditure increased marginally, by 0.4 percentage points (p.p.), while state governments’ share decreased by 0.4 p.p. However, some countries saw substantially greater changes than this average suggests. The share of expenditure by central government grew by 4.5 p.p. in Chile, and by 4.4 p.p. in El Salvador and Colombia, indicating greater centralisation. A similar pattern was seen among OECD countries, where central government expenditures increased by 4% on average. Two LAC countries changed away from centralisation between 2019 and 2021, with the share of central government spending decreasing in Ecuador (-2.2 p.p.), and Brazil (-1.7 p.p.). In Ecuador, this rebalancing benefited social security spending (+2.5 p.p.), while in Brazil it was directed towards the state (+0.7 p.p.) and local level (+1.0 p.p.) (Figure 11.6). The observed shift towards greater centralisation in the LAC region and OECD countries could be partially attributed to increased central government spending in response to the COVID-19 pandemic.
