Horizontal Fiscal Imbalances Research Articles

Political Decentralization, Subnational Political Capital, and Intergovernmental Transfers in Korea

Faced with ever increasing pressures for better performance and financial bottom line, governments around the world are devolving more responsibilities to subnational governments. Especially in developing countries, this trend has coupled with increased demands for greater democracy and disaffection with the services provided by the central government. This article examines what has happened in South Korea since its devolution reform in 1995. Specifically, it examines political capital factors in determining the amount of intergovernmental transfers to the regional governments. The analysis shows that political decentralization has resulted in financial weakening of the subnational governments of general purposes and that although the incidence of intergovernmental transfer is affected by the political considerations, Korea has substantially improved horizontal fiscal imbalance.

Fiscal Federalism: An Unlikely Bridge between the West and Quebec

Is there common ground in intergovernmental fiscal relations? This question is tackled by examining the ongoing federal-provincial debate about the most appropriate way to allocate resources among governments and the related issue of vertical and horizontal fiscal imbalance. It turns out that the provinces have found common ground with respect to vertical imbalance and the need to limit Ottawa’s spending power. The Equalization program, however, illuminates significant differences not only between Quebec and the western provinces but also among the four western provinces themselves. Fiscal federalism raises too many divisive issues for anyone to hope that these differences can all be settled in the foreseeable future.

El origen de la desigualdad y la progresividad en la distribución de la financiación de las Comunidades Autónomas de régimen común

The present paper has as aim to analyse the contribution to the inequality and progressiveness of financing resources of Comunidades Autónomas. In the first part we resume the literature on measurement of the horizontal fiscal imbalances in systems of federal funding, where we confirm the absence of instruments that measure the individual impact of each source of revenue. In the part 2 we propose the methodology to apply, in concrete the natural decomposition of the indexes of concentration and the direct decomposition of the index of Suits. In the part 3 we present the results of the application of the methodology proposed. And finally in the part 4 we present the conclusions, resulting that it is the Fondo de Suficiencia, as variable closing of the system, who determines the final distribution of resources and his progressive sense, but since a part of progressiveness disappear by the behaviour of the tributos cedidos, results indispensable the FCI to compensate said loss.

Closing the Gap: Fiscal Imbalances and Intergovernmental Transfers in Developed Federations

This paper discusses the concepts of vertical fiscal imbalance (the fiscal gap) and horizontal fiscal imbalance (equalization) and uses several statistics to measure these concepts for the eight developed federal countries: Australia, Austria, Belgium, Canada, Germany, Spain, Switzerland, and the United States. Although the periods covered and the detail provided vary from country to country because of limitations in data availability, the overall coverage in this paper seems more complete and comparable than in previous studies. The paper also outlines briefly the types of intergovernmental fiscal transfers used to deal with fiscal imbalances in the eight countries under consideration. Although this account is necessarily highly condensed, given the complexity of transfer systems in most countries, the frequency with which changes are made, and the difficulty of obtaining complete information, it is nonetheless broadly accurate.

A Century of Vertical Fiscal Imbalance in Australian Federalism

After a century of Australian fiscal federalism, while the problems posed by horizontal fiscal imbalance have largely been resolved, the thorny issue of vertical fiscal imbalance remains. After reviewing the evolution of economic doctrine on fiscal federalism, this paper examines the historical evolution of vertical fiscal imbalance in the light of the views expressed by Australian economists over the past century. It is argued that the perceptions of Australian economists largely reflect wider currents in mainstream economics, with an early ‘pragmatic’ view, an orthodoxy based around the dominant economic theory of fiscal federalism and a ‘dissenting’ school associated with Groenewegen.

Mechanisms for intergovernmental relations in federations

Federations employ a large variety of mechanisms for conducting relations between central, regional, and local levels of government. These mechanisms span the executive, legislative, and judicial branches of government within each level. Executive involvement ranges widely in degree of formality, from the making of formal intergovernmental agreements to informal liaison between governmental officers. Executive mechanisms have also evolved for correcting vertical and horizontal fiscal imbalances in federal systems. Legislatures play an important role in giving the force of law to cooperative policies initiated by the executive. These legislative mechanisms include reciprocal schemes, complementary schemes, mirror legislation, and the reference or delegation of powers from one level of government to another. The judiciary, though often undervalued, is significant for its role in establishing the legal framework within which other branches of government conduct their intergovernmental relations, through articulation of powers and competencies. The article concludes that policy makers should exercise care in selecting mechanisms that are appropriate to their task. In particular, regard should be had to the efficiency of each mechanism, and its conformity with federal values and the rule of law.

A NOTE ON POLITICAL FACTORS IN FEDERAL FISCAL ARRANGEMENTS IN AUSTRALIA

The Commonwealth Grants Commission represents a sophisticated institutional method of dealing with the problem of horizontal fiscal imbalances in Australia, which has managed to combine equity and efficiency considerations without untoward political bias. By contrast, the problem of vertical imbalance has been addressed by specific purpose payments, which are much more amenable to party political calculation, and can thus be employed to maximise electoral support. This note briefly reviews public finance and public choice models of intergovernmental grant determination and shows that a public choice perspective can shed at least some light on how party political factors may influence grants like specific purpose payments.

General Revenue Sharing

Enacted in 1972, general revenue sharing added a new dimension to the intergovernmental grant system in the United States of America. Unlike traditional categorical grant programs predicated on an externality or some other efficiency-based rationale, revenue sharing addressed issues of vertical and horizontal fiscal imbalances as well as political concerns about the growing influence of the federal bureaucracy in the fiscal affairs of states and localities. Scheduled to terminate at the end of fiscal year 1986, revenue sharing nevertheless remains a viable concept in reckoning the makeup of a well-ordered intergovernmental grant system. It is with an eye toward future deliberations about such a program that this paper is written. The findings from six years of research at the Brookings Institution are drawn upon, and a review is given of the lessons learned about the role of such a program and how the design of any future revenue sharing program might be enhanced, with specific emphasis on greater equity and more effective integration of federal and state roles in addressing the causes and consequences of local-area fiscal disparities.

Restoring Fiscal Equilibrium in the Canadian Federation: The Strides of the Harper Government

The Canadian federation is by no means a fiscal equilibrium and this imbalance has been a growing area of weakness for decades. However, the Harper Conservatives have acknowledged Canada’s fiscal imbalance and have placed it as a top priority for their government. Since 2006 Harper and his government have committed, and followed through with, several significant efforts towards fixing Canada’s fiscal imbalance through measures included in both the 2006 and 2007 federal budget plans. No other government in decades has taken such measures and actions to meet this goal. The paper begins by describing how Canadian fiscal relations have evolved into what has been termed the fiscal imbalance. The paper then outlines the actions the Harper Conservatives have taken to properly address the imbalance since 2006; including both the vertical and horizontal fiscal imbalances and the corresponding changes to the CST, CHT, the Equalization Program and the TFF. Lastly, the paper discusses the fiscal imbalance in relation to municipal governments and Harper’s initiatives in that area.[...]