FISCAL
FEDERALISM
TUĞBA KARAL 2008431032
ESRA YAZAR 2008431070
ELİF KESKİN
2008431038
DEFINITIONS OF FISCAL
FEDERALISM
“Fiscal Federalism" concerns
the division of public sector
functions and finances
among different tiers of
government.
The Theory of Fiscal
Federalism considers the
provision of goods financed
by taxes and the
appropriate
revenue collection system
at the regional level.
fiscal federalism is concerned with
"understanding which functions and
instruments are best centralized and
which are best placed in the sphere
of decentralized levels of
government." it is the study of how
competencies (expenditure side) and
fiscal instruments (revenue side) are
allocated across different (vertical)
layers of the administration.
Federal governments use this
power to enforce national rules
and standards. There are two
primary types of transfers :
• CONDITIONAL
(Canada Health Transfer)
• UNCONDITIONAL
(Federal Equalization Transfer)
Three Basic Ingredients For
the Theory of Fiscal Federalism
1) Each tier of government is then
seen as seeking to maximize the
social welfare of the citizens within
its jurisdiction.
2) Need for fiscal equalisation.
3) "Decentralisation Theorem"
"Decentralisation Theorem"
• "Decentralisation Theorem" constitutes the
basic foundation for what may be referred
to as the first generation theory of fiscal
decentralisation. The theory focused on
situations where different levels of
government provided efficient levels of
outputs of public goods "for those goods
whose special patterns of benefits were
encompassed by the geographical scope
of their jurisdictions." Such situation came
to be known as "perfect mapping" or
"fiscal equivalence."
ABOUT FISCAL FEDERALISM
• Sub-Central Government should have the ability to
provide goods and services that match the particular
preferences and circumstances of its constituents
• The provision of public services should be located at
the lowest level of government encompassing
geographically the relevant costs and benefits.
• Fiscal federalism will restrain the behaviour of a
revenue-maximizing government..
• Increased fiscal decentralization should limit
the size of the public sector.
• Ensuring time consistency is an important part
of the institutional framework which ensures
the credibility of a fiscal federalist system.
• fiscal federalism, that it improves efficiency in
the use of resources,should also apply in a
dynamic economic growth framework.
• fiscal federalism provide incentives for local
politicians to consider local preferences and to
spend time searching for innovations in the
production and supply of public goods and
services which could result in their costs and
prices being lower.
• Fiscal federalism loosens the grip of vested
interests on public policy, which promotes
democracy and (longer term) economic
growth.
• For fiscal federalism to work the appropriate
institutional framework has to include a
willingness on the part of the local politicians
to abide by the rules of a hard
budget constraint.
EXAMPLES OF FISCAL
FEDERALISM
• BELGIUM:Regions have almost complete
autonomy over 40% of their revenues (regional
taxes) and rate autonomy, but not tax base
autonomy,over the other 60%.(A federal
country)
• DENMARK:Income tax covers about 90% of
SCG tax revenues. Each SCG has tax rate
autonomy but tax base set by central
government.
• NETHERLANDS: SCGs choose which taxes
to levy within relevant Acts, and can vary tax
rates.
• SPAIN: Tax sharing with central
government,SCGs can set their own income
tax rates but not tax bases.
• SWEDEN: SCG tax revenue is from a single
tax base – personal income. Freedom to set tax
rates but not bases.
• UK: Council tax on imputed capital value paid
by all households, direct to local government
non-domestic rate set by Scottish and UK
parliaments. Scottish Parliament can also alter
the basic income tax rate within specified
margins but not tax base. Size of bloc grants
take into account level of local taxes raised.
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