Spending Too Much, Taxing Too Little? Parliaments in Fiscal Federalism

Abstract

In aggregate, general government spending in a democracy always tends to exceed general government revenue. This is because local orders of government typically raise less than they spend, with the difference covered by a block grant. This sets up well-known moral hazards associated with the resultant vertical fiscal imbalance. Various strategies for reducing this moral hazard are discussed, with foci on the possibilities of secession and of finding other ways to apply the Tiebout and marginalism principles.