Theory Of Fiscal Federalism Research Articles

The Dynamic Response of Municipal Budgets to Revenue Shocks

We study the fiscal and tax response to intergovernmental grants, exploiting quasi-experimental variation within Germany's fiscal equalization scheme triggered by census revisions of population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while the adjustment to losses is more rapid. Yet the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical anomalies such as the so-called flypaper effect may thus reflect a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism. (JEL E62, H71, H72, H77, R51)

الاعتبارات الاقتصادية والدستورية في تخصيص مسؤوليات الإنفاق في الدول الفدرالية

This study discusses the assignment of spending responsibilities in federal countries, taking into account both economic and constitutional considerations. According to the theory of fiscal federalism, the economic functions of governments contain resource allocation, stabilization, and redistribution. However, it is also important to consider constitutional considerations, as federal systems are based on constitutions and the distribution of power between government levels is influenced by political and historical variables. While economic considerations are vital for achieving efficiency and equity, constitutional considerations are crucial for determining functions and responsibilities and safeguarding the distribution of power consistent with federalism principles. Therefore, this study begins by questioning the best allocation of spending responsibilities in light of economic and constitutional considerations, and what methods can be used to solve conflicts that arise in government financial relationships. We assume that economic considerations alone are not enough to design the financial system, especially in federal countries. While they theoretically explain what needs to be done to achieve economic equity and efficiency, constitutional considerations explain the types of constitutions in terms of details of power distribution in general, including financial matters and functional responsibilities for both central and regional governments. We concluded that there is no one-size-fits-all approach for all federal countries to distribute powers, as federal states operate in different political and historical settings, and the nature of intergovernmental fiscal relations are constantly changing.

الاعتبارات الاقتصادية والدستورية في تخصيص مسؤوليات الإنفاق في الدول الفدرالية

This study discusses the assignment of spending responsibilities in federal countries, taking into account both economic and constitutional considerations. According to the theory of fiscal federalism, the economic functions of governments contain resource allocation, stabilization, and redistribution. However, it is also important to consider constitutional considerations, as federal systems are based on constitutions and the distribution of power between government levels is influenced by political and historical variables. While economic considerations are vital for achieving efficiency and equity, constitutional considerations are crucial for determining functions and responsibilities and safeguarding the distribution of power consistent with federalism principles. Therefore, this study begins by questioning the best allocation of spending responsibilities in light of economic and constitutional considerations, and what methods can be used to solve conflicts that arise in government financial relationships. We assume that economic considerations alone are not enough to design the financial system, especially in federal countries. While they theoretically explain what needs to be done to achieve economic equity and efficiency, constitutional considerations explain the types of constitutions in terms of details of power distribution in general, including financial matters and functional responsibilities for both central and regional governments. We concluded that there is no one-size-fits-all approach for all federal countries to distribute powers, as federal states operate in different political and historical settings, and the nature of intergovernmental fiscal relations are constantly changing.

Do you know to whom you pay your taxes? The case of decentralised Spain

AbstractSurveys show that most citizens are unable to correctly identify the taxes received or the services provided by the different levels of government. This shortcoming represents an obstacle to democratic accountability and for the efficiency gains that the theory of fiscal federalism attributes to fiscal decentralisation be effective. Exploiting the 2015 wave of the Spanish Institute for Fiscal Studies' Fiscal Barometer, this paper empirically determines the profile of citizens who are best able to identify the allocation of taxes among the central, regional and local levels of government. The estimates suggest that these citizens are those who are able to identify the government that provides the services financed by those taxes, who correctly identify other taxes received by the same government, who reside in a foral region, and who enjoy a high level of education.

The impact of fiscal decentralization on economic growth of regions of the Russian Federation

One of the priority goals for the state policy is ensuring sustainable economic growth. The theory of fiscal federalism argues that fiscal decentralization fosters both regional and national economic development by providing the opportunity to coordinate regional needs and national policy goals. The purpose of the study is to assess the impact of fiscal decentralization on the economic development of Russian regions. The analysis was conducted with panel data for 83 regions for the period 1996–2019. The simultaneous quantile regression approach with bootstrapping standard error was used for econometric modelling. The results of the study show that fiscal decentralization does not contribute to the economic development of more prosperous regions of the Russian Federation, whereas in less developed regions, fiscal decentralization indicators have a significant negative effect on the gross regional product per capita. Based on the results obtained, proposals aimed at improving state policies were made.

Theories of local government financing: A comprehensive theoretical review

This journal article provides a comprehensive theoretical review of various models and theories that underpin local government financing. It explores the Principal Agency theory, the Theory of Fiscal Federalism, the Benefits-Pay-Principle theory, the Cost-of-Service Theory of Taxation, the Efficiency Service theory, the Intergovernmental Fiscal Framework, the Revenue Enhanced Model, the Benefit Model of Local Finance, the Modified Quantitative Service Delivery Model (MQSDM), and the Theory of Fiscal Federalism. The article examines the foundations, principles, and applications of these theories in the context of local government finance. By addressing the theoretical underpinnings of local government financing, this article contributes to a deeper understanding of the complexities and challenges involved in funding essential public services and infrastructure at the local level.

Fiscal Federalism and the COVID-19 Crisis: Theoretical Aspects and Poland’s Experience

Abstract The article analyzes the specifics of the COVID-19 crisis and its impact on the public finance system, taking into account the key problems of the theory of fiscal federalism. The purpose of this article is to examine the impact of the pandemic crisis on the fiscal relations taking place between different levels of public authority (intergovernmental relations – IGR), considered in the context of the decentralization of the public finance system and the associated distribution of public functions and resources. The article refers to the model features of these relationships, as defined in the theory of fiscal federalism. It also examined the responses of European countries to the negative effects of the COVID-19 crisis, taken within the framework of the IGR, in order to limit the negative effects of the pandemic at different stages. An attempt was also made to answer the question of how the current pandemic crisis may change the multilevel governance (MLG) patterns set forth in the doctrine. The Polish public finance system was used as an example for detailed analysis in this regard.

Green economic development under the fiscal decentralization system: Evidence from china

The literature is still divided on the study of the ecological and economic effects of fiscal decentralization. To clarify the relationship between fiscal decentralization between central and local governments and green economic development in developing countries, we take China as an example to test the impact of fiscal decentralization on green total factor productivity and its mechanism. It is found that fiscal decentralization helps local governments play a greater role in the regional economic system and promotes green economic development. From the perspective of policy synergy, environmental regulation is an enhanced mechanism for fiscal decentralization to promote green economic development. We also find that technological innovation is an important mechanism for fiscal decentralization to promote green economic development. Our study develops the theory of fiscal federalism and affirms the necessity of decentralization system reform in the context of the green economy, which has important theoretical and practical implications.

Decentralization and local pollution activities: New quasi evidence from China

AbstractTraditional fiscal federalism theory holds that decentralization may improve the provision of public goods and services. However, the social welfare field with strong externalities may face different incentives and behavioural logics. This paper provides novel empirical evidence for the causal relationship between decentralization and local pollution. In this paper, we focussed on China's widely spread decentralization reform, which substantially expanded the economic and social management autonomy of county governments. Using the difference‐in‐differences method and a panel dataset from 1998 to 2007, we found that the reform would compel affected counties to loosen environmental regulation, adopt financial and fiscal policies that would actually support heavy‐pollution industries' rapid economic growth. Overall, the reform led to a significant increase in local pollution, thus worsening the overall environmental quality. Moreover, cost‐benefit analysis indicated that the reforms generated net gains in social welfare, but the substantial environmental costs cannot be ignored.

The Impact of Soft Budget Constraint on the Fiscal Co-responsibility of the Autonomous Communities in Spain: The Case of Extraordinary Liquidity Funds (2012-2019)

According to the Second Generation of Theories of Fiscal Federalism, if subcentral governments can increase the level of spending without taking responsibility for the cost due to the existence of a soft budget constraint, incentives are created for financially irresponsible behavior. Since 2012, the central government in Spain has created various funds with the aim of improving the liquidity of the Autonomous Communities, but their design has meant that the latter can obtain resources at little cost. This paper tests the hypothesis under which the regions that have received more extraordinary liquidity funds have had a less prudent fiscal behavior, finding no evidence of it. The level of unemployment, the financial insufficiency and the electoral cycle of the budget are the determining factor in explaining greater non-compliance with deficit and debt targets and higher deficit and debt growth rates.

Fiscal Decentralization and the Composition of Local Government Expenditure: Evidence from South Korea

The implicit idea underlying theories of fiscal federalism is that fiscal decentralization can change the composition of government expenditure. That is, regardless of whether decentralization enables governments to more readily reflect citizen preferences regarding spending categories or fosters a race to the bottom with reduced taxation and public service levels, change in the composition of government expenditure may ensue. This study indirectly tests the impact of decentralization with respect to allocative efficiency by examining the relationship between fiscal decentralization and expenditure composition. Utilizing data from 224 local governments in South Korea over the period 2008–2018, the study finds that fiscal decentralization exerts downward pressure on welfare expenditure and that it tends to shift spending from the current to the capital account. Specifically, it finds that it is mainly revenue-side decentralization that affects the allocation of government expenditure.

Poverty Trap and the Debacle of Economic Development in Nigeria

In 1973, Gowon the then Head of State of Nigeria proclaimed that money is not the country’s problem, but how to spend it. At that time, Nigeria was awash with oil money accruing to her from the oil boom. Today, Nigeria is regarded as the poverty capital of the world making scholars of development to question what really went wrong; where did the country got it all wrong? It is thus in view of this rapid decline from abundant wealth to chronic borrowers that this study was developed. The study relied on secondary sources of data for information. Thus, the theory of fiscal federalism as developed by K.C Wheare was applied and the findings of the study revealed the political, economic and social structure of the country to be an enforcer of poverty. To this end, the study recommended that if the country is to escape the poverty trap which she finds herself, there must be a complete overhaul of the present structure to allow for more economic flexibility of the constituent unit as the present structure was noted for being too rigid for development.

Municipal finance analysis: The case study of Gujarat (India)

This paper theoretically underpins the idea of greater involvement of local governments in the overall development of India explained through the theory of Fiscal Federalism. The theory outlines the dynamics of decentralization of power and functions through a multi-layered governance system leading to a new structure and added functions, finance, and accountability to local government. The paper also provides an overview of the increasing role of urban local governments in India and investigates whether the Urban Local Bodies (ULBs) of Gujarat – a state in India, are efficient to perform the functions and responsibilities assigned to them by the 74th Constitutional Amendment Act (CAA). It scrutinizes the financial health of local governments in the urban regions of India. The results based on the application of MANOVA indicate that the 74th CAA empowered ULBs with a strong economic base that these ULBs are capable of mobilizing their own resources. This means that smaller municipalities must develop and convergence must be supported by a proportionate level of grants. This will ensure that with the development of social infrastructure, economic activities will increase, and, as a result, the conversion will occur.

The Dynamic Response of Municipal Budgets to Revenue Shocks

We study the fiscal and tax response to intergovernmental grants, exploiting quasi-experimental variation within Germany's fiscal equalization scheme triggered by Census revisions of official population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while adjustment to revenue losses is more rapid. Yet, the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical anomalies in public finance such as the flypaper effect are thus primarily a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism.

The Dynamic Response of Municipal Budgets to Revenue Shocks

We study the fiscal and tax response to intergovernmental grants, exploiting quasi-experimental variation within Germany's fiscal equalization scheme triggered by Census revisions of official population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while adjustment to revenue losses is more rapid. Yet, the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical anomalies in public finance such as the flypaper effect are thus primarily a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism.

Fiscal Discipline and Budget Processes: Evidence from Zimbabwe

Zimbabwe is one of the least fiscally performing countries in Sub-Saharan Africa, with some fiscal outcomes for years 2009 to 2019 being unsatisfactory. The IMF 2020 Article IV consultation report on Zimbabwe suggested that fiscal and monetary slippages experienced in 2018 and 2019 resulted in macroeconomic imbalances in 2019 and greater part of 2020. The study adopted a qualitative approach to investigate the relationship between fiscal discipline and the budget processes in Zimbabwe. Informed by the fiscal illusion theory as well as the formative fiscal federalism theory, the study established that the growth in fiscal indiscipline in Zimbabwe leads to widening fiscal deficits, increased direct budget financing requirements on the domestic market and unsustainable debt profile. Fiscal indiscipline is driven by weak budget institutional frameworks, party institutionalisation and economic sanctions.To enhance fiscal discipline, strengthening and implementation of existing fiscal institutional frameworks and engagement of the international community on sanctions are necessary. Publication of agreed fiscal targets for credibility purposes may help. Promoting increased savings during booms for consumption smoothening in periods during periods of droughts, cyclones and pandemics is encouraged.

Fuzzy Stochastic Automation Model for Decision Support in the Process Inter-Budgetary Regulation

The purpose of this article is to study the theoretical foundations of the concept of fiscal decentralization, as the main path of self-development of the national economy of any country, and to develop mathematical tools that support decision-making in the aspect of “hard” budget constraints. The study of the problems of fiscal policy formation in foreign countries presented in modern scientific literature has revealed that the degree of application of the concepts of “soft” and “hard” budget restrictions is an actual topic in the theory of fiscal federalism. It has been substantiated that decision-making within the framework of “soft” budget constraints (financial assistance) leads to low tax autonomy of territories and limited liability of regional and municipal authorities for the results of their financial policy. As a research hypothesis, we put forward the thesis that it is necessary to create conditions for encouraging subnational authorities to support the territorial economy by granting them the possibility to use part of the taxes collected in the respective territories. The implementation of this thesis has given rise to the problem of quantifying decisions made regarding the establishment of standards for the distribution of tax revenues between budgets of different levels of the hierarchy of the country’s budget system. In terms of solving this problem, the author has constructed mathematical models based on the use of synthesis of mathematical apparatus of the theory of stochastic automata, fuzzy algebra, and simulation. In terms of solving this problem, the author proposed the use of mathematical modeling methods. The article presents the results of constructing economic and mathematical models to support decision-making in the vertical distribution of tax revenues between budgets. The models include stochastic automata, as mathematical abstractions, describing the expedient behavior of an economic agent when choosing management alternatives for territories of different levels of economic development. The transition functions of automaton models are formally described on the basis of the synthesis of mathematical apparatus of the theories of stochastic automata operating in random environments and fuzzy sets. The expediency property of the behavior of automaton models is justified by proving the corresponding theorems. The random environment in which stochastic automata are immersed is formed by a simulation model. The article demonstrates the results of experiments carried out on models, as well as a conceptual scheme of interaction between the automaton and simulation models.

La desigualdad estructural de la inversión educativa por alumno en Argentina entre 1991-2019

Basic education in Argentina is organized under a federal and decentralized scheme. The concern for equity and redistributive justice in educational financing under this scheme presents particularities and complexities that need to be understood in order to address the inequality around educational investment. The decentralization of educational institutions to subnational jurisdictions generated two institutionalized effects. The structural inequality of educational investment per student under state management at the subnational level and, at the same time, it has been almost three decades that the national state has not directly managed the Educative offer. From the perspective of the theory of fiscal federalism, intergovernmental fiscal tools are designed that allow an impact on inequities and inequalities between both levels of government. The educational investment gap with subnational financing increased from 5 to 8 times between the lowest and highest investment. The national State, established with funds of national origin to reduce it to between 3 and 5 times, remaining constant throughout the period. The incidence of transfers of national origin made it possible to reduce the gap of structural inequality in educational investment between subnational jurisdictions, although the challenge consists in planning financing in the search for equity and distributive justice under this federal and decentralized scheme.

Which competences for sub-national jurisdictions and how to finance them? The economic theory of fiscal federalism from the foundations to nowadays

This paper describes the evolution of the recommendations resulting from the theory of fiscal federalism concerning material and fiscal competences. More precisely, this article will develop the theoretical arguments that will make it possible to judge which competences are best managed at which level of power and how best to finance them. I shall firstly describe the content of the major State functions, as well as classic and new recommendations for the distribution of competences between levels of power. I will then develop classic and new ideas about different ways, for a decentralized state, of organizing the financing of federated and/or decentralized jurisdictions. The balance between equity and efficiency considerations will often lead to acceptable solutions. The growing importance of “global” public goods such as environmental protection must also be considered. Finally, responses to regionalist aspirations have opened original ways of decentralizing material and fiscal powers.

Beyond the nation-state: territory, solidarity and welfare in a multiscalar Europe

ABSTRACT The European welfare state has been founded on the nation-state, within stable boundaries. The nation provided affective solidarity. The state provided the institutional capacity. Coterminous boundaries for the economy and welfare bounded social and economic interests and encouraged social compromises. With spatial rescaling, economic regulation, welfare provision and political identities have migrated to new levels. Regions and cities are presented as in competition for economic development. States seek levels of regulation above and below the state. This may lead to a ‘race to the bottom’ as regions deregulate and cut spending to attract mobile capital. New regional identities may undermine national solidarity. Theories of fiscal federalism have placing redistributive competences at the highest level to avoid this. Yet, there may be a race to the top as regions experiment in new forms of social provision. New forms of affective solidarity may emerge at new scales. All public policies, and not just explicitly social ones, have a distributive effect. Differences are emerging across substate territories in welfare priorities and distributional policies. These often depend on the constitution of regional policy communities and social compromises. There is no simple race to the bottom or to the top, but a variety of experiences.