The Multi-Faceted Challenges of Fiscal Capacity in Eastern Europe

An extensive body of literature refers to structural constraints of fiscal consolidation in post-communist countries. In this context, increased attention has been dedicated to the consolidation process of the public administration system (Dimitrov et al 2002, Grzymala-Busse 2002; 2007, D’Arcy 2012). However, less emphasis was laid on country specific variation in fiscal capacity between the local and central levels of public administration authorities. This paper aims to partly fill this void and investigates the role of national and international institutional determinants in guiding fiscal policy in Romania, and Moldova. From this perspective, it accounts for a large array of factors that can affect the fiscal capacity of a administrative unit—from public policy design, to party politics, and down to institutional distortions. It provides an in-depth analysis of Romania and Moldova based on evidence of fiscal revenues and expenditures in local public administrations for the period 1999-2013. It also uses process-tracing, interviews, and analysis of official documents to account for the evolution of the institutional framework in these two neighboring countries. The evidence supports the argument that tax policy decision-making is largely constrained and determined by administrative institutional capacity. Consequently, the paper brings a dual contribution to the existing literature on the politics of taxation in the EU. It compares and contrasts the effectiveness of fiscal administration in the two countries, and accounts for structural challenges of fiscal capacity including distortions such as tax evasion or avoidance.