FISCAL FEDERALISMFISCAL FEDERALISM

TUĞBA KARAL 2008431032 TUĞBA KARAL 2008431032 ESRA YAZAR 2008431070ESRA YAZAR 2008431070

ELİF KESKİN 2008431038ELİF KESKİN 2008431038

DEFINITIONS OF FISCAL DEFINITIONS OF FISCAL FEDERALISMFEDERALISM

““Fiscal Federalism" Fiscal Federalism" concerns the division of concerns the division of

public sector functions and public sector functions and finances among different finances among different

tiers of government. tiers of government. 

The Theory of Fiscal The Theory of Fiscal Federalism considers the Federalism considers the 

provision of goods financed provision of goods financed by taxes and the by taxes and the

appropriate appropriate revenue collection system revenue collection system

at the regional level.at the regional level.

fiscal federalismfiscal federalism is concerned with  is concerned with "understanding which functions and "understanding which functions and instruments are best centralized and instruments are best centralized and which are best placed in the sphere which are best placed in the sphere

of decentralized levels of of decentralized levels of government." it is the study of how government." it is the study of how

competencies (expenditure side) competencies (expenditure side) and fiscal instruments (revenue and fiscal instruments (revenue

side) are allocated across different side) are allocated across different (vertical) layers of the (vertical) layers of the

administration.administration.

Federal governments use this Federal governments use this power to enforce national rules power to enforce national rules and standards. There are two and standards. There are two primary types of transfers :primary types of transfers :

• CONDITIONAL(Canada Health Transfer)

• UNCONDITIONAL(Federal Equalization Transfer)

Three Basic Ingredients For the Three Basic Ingredients For the Theory of Fiscal FederalismTheory 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"  • "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 FEDERALISMABOUT 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 EXAMPLES OF FISCAL FEDERALISMFEDERALISM

• 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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