Fiscal Federalism Research Articles

Fiscal Federalism and Interplay of Redistribution: A Study of Telangana State's Finances, Capacityand Governance

Fiscal Federalism and Interplay of Redistribution: A Study of Telangana State's Finances, Capacityand Governance

An Examination of Property Tax within the Context of Fiscal Federalism in Nigeria

An Examination of Property Tax within the Context of Fiscal Federalism in Nigeria

Economic performance of the pairing-off poverty alleviation between China’ cities

This study evaluates the economic performance of China's East-West pairing-off poverty alleviation, a policy enacted in 2016 aiming to eradicate absolute poverty by 2020 through substantial fiscal transfers from the assisting cities to the assisted impoverished counties. Employing a counterfactual framework and analyzing data from 2013 to 2018, this research assesses the economic performance of China's East-West pairing-off poverty alleviation. Our findings reveal a negative impact of the fiscal pressure burdened by the assisting cities on their economic performance. Meanwhile, the allocation of anti-poverty funds to the assisted counties does not exhibit a significant impact on their economic outcomes. The mechanism analysis suggests that the fiscal pressure experienced by the assisting cities shows negative impacts on fixed assets investment, innovation activities, and economic growth expectations. Further analysis indicates a negative relationship between the policy and the growth of secondary industry and rural income in the eastern regions, while simultaneously identifying a positive impact on the enterprises' financial burden. These results underscore the complex economic trade-offs inherent in poverty alleviation strategy transferring fiscal funds from developed regions to less developed regions and call for a global understanding of pure cash transfer programmes' impacts.

Accountability and fiscal transfer: The perfect duo for enhancing the regional economy

Each region in Indonesia receives varying amounts of fiscal transfers from the central government, influenced by regional characteristics and accountability. This study examines the impact of fiscal transfers with accountability as a catalyst for the economic growth of Indonesia's regions proxied by gross regional domestic income. The independent variables are the General Allocation Fund (DAU), Special Allocation Fund (DAK), and Revenue Sharing Fund (DBH), while accountability as control variables proxied by BPK audit findings, bureaucratic reform (RB), SAKIP, and APIP scores. Data from 34 provinces over 2016-2020 (170 observations) were analyzed using a fixed effects model and Panel Corrected Standard Error regression. This research fills a gap by examining the simultaneous effects of fiscal transfers on economic growth. The findings indicate that fiscal transfers significantly impact regional economies. The DAK has the highest effect, followed by DBH and DAU. Accountability, measured by APIP, SAKIP, RB scores, and BPK audit findings, is essential for efficient use of transfer funds. BPK audit findings negatively impact the regional economy, underscoring the need for regional governments to improve accountability to optimize central government transfers and support economic growth. Thus, fiscal transfers and accountability are pivotal for enhancing regional financial management and economic performance.

Immigrant legalization and the redistribution of state funds: Evidence from the 1986 IRCA

We study the impact of immigrant legalization on fiscal transfers from state to local governments in the United States, exploiting variation in legal status from the 1986 Immigration Reform and Control Act (IRCA). State governments allocate more resources to IRCA counties, an allocation that is responsive to the electoral incentives of the governor. Importantly, the effect emerges prior to the enfranchisement of the IRCA migrants and we argue it is driven by the IRCA’s capacity to politically empower already legal Hispanic migrants in mixed legal status communities. The IRCA increases turnout in large Hispanic communities as well as Hispanic political engagement, without detectably triggering anti-migrant sentiment.

New insights on immigration, fiscal policy and unemployment rate in EU countries – A quantile regression approach

Free movement of production factors in the enlarged EU has led to immigration flows from East to West and from South to North with a significant impact on EU labor markets. Fiscal federalism also determined large immigration flows into EU area and affected unemployment rate in the EU countries. The aim of this paper is to investigate the impact of factors such as number of immigrants, tax on profits, social contributions, economic growth and population growth on unemployment rates in EU area using a panel quantile regression and an PMG-ARDL approach as robustness test during 1991–2020. The results show a positive association between population growth and unemployment rate, whereas the remaining exogenous factors are negatively associated with unemployment rate. Still, social contributions are statistically significant only for upper quantiles. The overall impact of social contribution on unemployment rate is positive as per PMG-ARDL estimations. We have also demonstrated that the immigrant flows impact on unemployment rate is very weak. The factors that are exerting the most significance influence on unemployment rate, are economic and population growth, followed by tax on profits. Findings support policy recommendation in EU area in terms of fiscal policy.

Is ‘Common Prosperity’ Badly Needed in Mainland China? Evidence on the Variance Convergence of Per-Capita GDP among 31 Cities and Provinces

ABSTRACT This research paper examines the necessity of implementing “common prosperity” in mainland China, as emphasized by Xi Jinping during the 20th Congress of CCP on October 16, 2022. The issue of provincial income divergence remains a challenge to China’s sustainable growth. The new concept of “common prosperity” stresses the requirement of reducing income inequality for the balance of growth and stability in the next development phase of China. This study analyzes regional income inequality and convergence using the club convergence approach. This method offers more precise indications of economic symmetry than traditional unit root tests, enabling clearer policy implications. The empirical analysis reveals that while full cross-provincial variance convergence is unsustainable, the 31 cities and provinces can be grouped based on club variance convergence of the per capita GDP. The past and current public policies could have an impact on the imbalanced convergence, such as “the richer got more” from the fiscal transfers, the hukou system, and the educational and tax justice among cities and provinces.

Evaluation of fiscal policy with text mining under "dual carbon" target in China

The establishment of “dual carbon” goals exemplifies China's global commitment as a responsible sovereign and the methodical advancement toward these aims is illustrative of China's capable governance in countering climate transformation. The actualization of “dual carbon” targets is contingent upon the foundation of robust fiscal policies, and meticulous assessments of policy documentation are instrumental in reflecting the foreseen efficacies of these measures. The study employs text mining techniques to articulate evaluative benchmarks for fiscal policy scripts under the “dual carbon” framework and engages a bidirectional fixed-effects model to corroborate the linkage between fiscal policy implements and carbon emissions, alongside a holistic appraisal using the PMC-CRITIC index model. The research corroborates that fiscal instruments, such as tax reliefs and green fiscal transfers, significantly encourage the diminution of carbon emissions. The average PMC-CRITIC index of the policy specimens assessed is 0.62, indicating a level that is permissible yet indicating potential for further refinement. Of the reviewed policy samples, the preponderance adheres to satisfactory thresholds, with an ensuing tier demonstrating exceptional policy. The average evaluations of policy timeliness, nature, and evaluation are laudable, notwithstanding the necessity for ameliorations in the precision of policy objectives, the credibility of the policy objects, and the targeted applicability of policy tools. Accordingly, in the trajectory of impending policy development, there should be an amplification of the collaborative mechanisms both horizontally among sundry tiers of local governance and vertically across disparate bureaucratic strata, the adoption of a systemized approach to elucidate and resolve the fundamental dissonances in actualizing “dual carbon” objectives.

Place-based policies, agglomeration economics, and environmental impacts: evidence from China’s Xinjiang targeted pairing aid program

Concerns about opportunistic behaviors by governments and their failure to recognize local needs are significant issues with place-based policies. In China’s aid program targeted at Xinjiang, rather than solely relying on fiscal transfers and centralized decision-making, there was encouragement for the involvement of state-owned enterprises and direct cooperation between aid providers and recipients. While these arrangements have helped the program succeed in addressing concerns related to place-based policies and have contributed to economic growth in recipient areas, there are potential negative impacts on the local environment, leading to what is termed as a pollution heaven scenario. Analyzing of data from 72 ethnic cities in China using a difference-in-differences approach, we demonstrate that the program resulted in notable increases in local GDP and PM2.5 concentrations, accompanied by expansion of polluting industries. This study is pertinent to ongoing discussions in place-based policy research and offers policy insights both domestically and internationally.

Does fiscal decentralization reduce environmental degradation through mitigating resource mismatch and digital transformation? Evidence from China's resource-based cities

Fiscal federalism grants local governments a certain degree of fiscal autonomy and stimulates their motivation. This study analyses the impact of fiscal decentralization on urban carbon emission reduction using the double fixed-effects model and the mediated-effects model using data from 187 resource-based cities in China from 2011 to 2020. It is found that fiscal decentralization significantly promotes energy saving and emission reduction, which is reflected in the significant negative correlation between fiscal decentralization and the size of urban carbon emissions and the positive correlation with carbon emission efficiency. These results are still robust after replacing the carbon emission scale and carbon emission efficiency and using the instrumental variable method. Heterogeneity analysis reveals that fiscal decentralization significantly suppresses the carbon emission scale and positively contributes to carbon emission efficiency in the country's east-central part and resource-based cities with lower marketization. Mechanistic analyses suggest that mitigating land resource mismatch and enhancing the degree of government digital transformation are critical factors for fiscal decentralization to reduce carbon emissions. This study provides empirical support for how policymakers can balance the relationship between economic development and environmental protection when formulating local fiscal policies.

Can government digitalization promote the urban–rural equalization of basic public services? Evidence from double machine learning

ABSTRACT Information technology, as an important tool for realizing the modernization of national governance system and capacity, has brought new opportunities for improving the government’s capacity to deliver basic public services (BPS). Taking the information benefiting people pilot policy as an exogenous shock, we use the double machine learning model to examine the impact of government digitization on urban – rural BPS equalization based on panel data of prefectural cities in China from 2006 to 2021, which overcomes the limitations of the linear setting of traditional causal inference models and maintains estimation accuracy under high-dimensional control variables. The findings suggest that government digitization can significantly contribute to urban – rural BPS equalization, and this conclusion holds after a series of robustness tests. Mechanism test reveals that government digitization promotes urban – rural BPS equalization by improving the efficiency of BPS supply and the efficiency of fiscal transfer payment. Moreover, for cities with low fiscal pressure, high fiscal transparency and low economic growth pressure, government digitization will have a stronger driving effect on urban – rural BPS equalization. This study provides valuable theoretical insights and policy ideas for promoting BPS equalization through digital governance.

Fiscal Federalism, ARPA, and the Politics of Repair

Abstract The American Rescue Plan Act (ARPA) represents a politics of repair for American Federalism. The unprecedented size, scope, and timeliness of ARPA enable local governments to address some of the structural inequities laid bare by the pandemic. U.S. Federalism was broken before the pandemic, with states exerting a triangle of pressures that created a tightening vice on local government through revenue restrictions, downloading expenditure responsibilities, and restricting local policy authority. Recent federal action through ARPA has helped ease the pressure on local revenue, enabling new expenditures and new policy action. ARPA is larger, longer, and more expansive than the American Rescue and Recovery Act passed after the Great Recession. We analyze revenue and expenditure data for all local governments and special districts from 2000 through 2022. ARPA represents a layer in the palimpsest of federalist policy, a politics of repair, that reminds us that more cooperative federal-local relations are possible.

Paradoxes of the Anti-crisis Role of Fiscal Federalism: Analytical Review of Studies

The analytical review of studies of the anti-crisis role of fiscal federalism during economic, ecological, epidemic challenges and territorial conflicts in 1950–2024 reveals four paradoxes. The first of them indicates the scientific validity of the positive anti-crisis effect of fiscal decentralization. But when crises arise in practice, decentralization turns out to be unclaimed, and preference is given to centralization. The second paradox is related to the nonlinear positive effect of fiscal decentralization on economic growth, natural resources consumption, and carbon emissions. For example, the nonlinear positive effect of decentralization is achieved when the institutional context is improved. The third paradox is the relatively weak methodological elaboration of fiscal federalism during pandemic challenges, although it had the greatest practical relevance compared to more in-depth econometric studies of economic and environmental challenges. The fourth paradox is that fiscal federalism can both resolve the territorial conflict and create the preconditions for its resumption in the future. The peacemaking conditions of fiscal federalism are transparency and stability of inter-budget transfers, as well as insured access of the conflict region to its natural resources.

Indian Fiscal Federalism and Resource Gap of State Governments: Measurement and Analysis

This article examines the various forms of basic resource gap (BRG) and fiscal dependency in a long-term panel framework, comprising 14 major Indian states from 1981–82 to 2016–17. Further, it decomposes the level and extent of states’ fiscal dependence on transfers and borrowings, which together constitute the total non-own source of revenue on a disaggregated level into three different phases to gain a thorough understanding of the states’ vulnerability and the quality of dependence. The findings show that among the 14 states, Odisha, Karnataka, Tamil Nadu and Uttar Pradesh are leading the way in reducing the BRG during the third sub-period. Odisha’s fiscal dependency has decreased faster and has been sustained to a greater extent than in the other states. In contrast, the accumulation of unsustainably higher levels of debt and guarantees is an issue of concern in West Bengal, Punjab and Kerala, where discretionary sources of revenue have increased significantly in recent decades. The study finds that, despite several incentive-based reform measures, the BRG persists, with mounting fiscal challenges besides a decline in non-debt capital receipts across the Indian states.

Who Are the Hand-to-Mouth?

Abstract Many households hold little wealth. In standard precautionary savings models, these households should not only display higher marginal propensities to consume (MPCs) but also higher future consumption growth. In contrast, we see from the Panel Study of Income Dynamics that such “hand-to-mouth” households do not display higher growth in spending. They also exhibit greater volatility of spending and adjust their spending to a greater extent through the number of categories consumed. Consistent with a role for preference heterogeneity, the panel data show that it is persistent differences across households, not current assets, that predict low consumption growth and other spending differences for the hand-to-mouth households. To identify the extent of preference heterogeneity, we consider the model of Kaplan and Violante with both liquid and illiquid assets, but allow heterogeneity in preferences. To match the data, many poor hand-to-mouth must be relatively impatient and have a high inter-temporal elasticity of substitution. The model shows that preferences predominantly explain the higher MPCs for low-asset households. Preference heterogeneity notably increases the spending impact of fiscal transfers, but only if targeted, while reducing that from interest rate cuts.

Will voters polarize over pandemic restrictions? Theory and evidence from COVID-19

In a pandemic, voters will polarize over the choice of restrictions their society needs to impose. This is because in the eyes of voters, optimal restrictions vary with individual and aggregate productivity, vaccination status, and government fiscal transfer capacity. Specifically, less productive voters and those with a limited vaccination status prefer milder restrictions. In addition, voters in countries with superior vaccination programs prefer harsher restrictions, but the effect is weaker when their government has stronger fiscal transfer capacity. These propositions have been tested using the largest global dataset of pandemic restrictions and vaccination rates and are broadly confirmed. Consequently, the paper explains both cross-country variations in restrictions during the COVID-19 pandemic and their development as vaccination programs gained traction. It also offers policy insights into the level of restrictions for future pandemics that different voters will deem tolerable.

The Effectiveness of Fiscal Transfer of South Sumatra Province: Initiation of Ecological Fiscal Transfer Concept

This study identifies the effectiveness of South Sumatra Provincial Government’s financial assistance budget transfer on Poverty Levels and the Human Development Index. This fiscal transfer from the Provincial Government is to assist and support the Regency/City Governments’ budget for their development program. The problem of this study is to identify the effect of this fiscal transfer to support the Regency/City Government in reducing poverty level and increasing Human Development Index. A coefficient of determination analysis is applied to assess the effect of the provincial financial assistance to reduce poverty rates and increase the Human Development Index. Analysis is also conducted to identify opportunities for the implementation of Ecological Fiscal Transfer model for the allocation of financial assistance budget. The study analyzes data from the Regional Budget of South Sumatra Province for the last 10 years. Coefficient of determination analysis shows that the fiscal transfer in the form of financial assistance fails to explain the variation of poverty rates and the Human Development Index in the area. Following that, the study also adopted an Ecological Fiscal Transfer model to simulate the allocation of Provincial Financial Assistance. Keywords: financial assistance, ecological fiscal transfer, poverty, Human Development Index

The political economy of fiscal transfers: The case of Ethiopia

AbstractThis article examines the political economy of fiscal transfers in Ethiopia. Utilising an original data set spanning 1995–2020, as well as interviews and document analyses, the article illustrates how different factors interact to shape the distribution of grants. Statistical analysis indicates that population size is critical in determining regional grant shares. However, the analyses reveal a pattern of ethno‐regional favouritism in grant distributions during the early stages of Ethiopian federalism. During that period, opaque and centralised decision‐making processes, coupled with the dominant influence of the Tigray People's Liberation Front in the federal government, resulted in grant distribution deviating from principles of fiscal equity. Over time, this evolved into more fluid forms of negotiation influenced by intra‐party competition, dynamics of bargaining between the central and regional authorities, and regional assertiveness, collectively shaping the allocation of grants alongside the grant formula. The analysis highlights how economically and politically marginalised regions are disadvantaged, especially when their population is small. The absence of an independent grant agency means that political considerations continue to affect seemingly formula‐driven allocations. The Ethiopian case underscores how intra‐party bargaining and alignment along ethnic and regional lines undermine the effectiveness of formula‐based grant allocations in the absence of an independent and empowered grant agency.

Dwindling funds and increased responsibilities: Decentralization, unfunded mandates, and Harare's infrastructure crisis

Zimbabwe's capital city, Harare, faces severe infrastructural challenges. The city is presented with major constraints in its ability to adequately provide services for its growing population while losing essential streams of revenue required for infrastructural maintenance and development. This occurs in the context of the decentralization from the Zimbabwean national government to its cities. Cities like Harare are tasked with mandates to govern but are not provided the adequate financial means nor support to sustain their population or aging infrastructure. In this paper, we study this issue by conducting a broad literature review on decentralization and unfunded urban mandates, before narrowing our focus to decentralization and urban governance in sub-Saharan Africa. We then interrogate Harare as a case study, drawing on two rounds of interviews in 2015 and 2022 to identify key aspects of Harare's infrastructure crisis, which we tie to its unfunded mandates. We conducted 51 semi-structured expert interviews, and 4 extensive focus groups with a total of 32 people in order to revisit key themes that were prevalent during the first round of interviews. This was complemented by a review and analysis of national and city budgets and other relevant reports to demonstrate trends on revenue generation, capital expenditure and dynamics around intergovernmental fiscal transfers (IGFTs). We offer novel insights into Harare's infrastructure crisis, while also raising several urban financing and decentralization themes that are applicable from a global perspective.

Bankruptcy law as an alternative to fiscal policy in a Woodford model with a productivity shock

Abstract We show that trade credit contracts between sectors can provide a useful alternative to fiscal transfers during a major productivity shock. Defaults in credit contracts function as transfers between sectors, which can be implemented through a bankruptcy law or through credit renegotiation. Transfers implemented through defaults allow for a reduction in the size of the fiscal policy that restores the economy to the optimal allocation, constituting a relevant alternative to economies without an available fiscal space to implement the optimal policy.