The impact of fiscal decentralization in the 2015 State Budget Law on local tax effort: Empirical evidence from Viet Nam

Abstract

This study quantifies the causal impact of the 2015 State Budget Law reform on fiscal decentralization on the tax effort of local governments in Vietnam. Using the Difference-in-Differences (DID) method with panel data from Vietnam's 63 provinces and cities for the period 2011- 2022, the study provides empirical evidence that the reform has had a net negative impact on tax effort. Further analysis indicates that this effect is primarily driven by an increased dependency on central government transfers. This mechanism has created a soft budget constraint, weakening revenue collection incentives and outweighing the limited positive effects of increased expenditure autonomy. Accordingly, the study proposes policy implications aimed at rebalancing the fiscal decentralization system, including: (i) linking intergovernmental transfers to performance; (ii) expanding local revenue autonomy; and (iii) strengthening independent fiscal oversight mechanisms.