Fiscal federalism

rdf:langString Fiscal federalism

rdf:langString As a subfield of public economics, 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" (Oates, 1999). In other words, it is the study of how competencies (expenditure side) and fiscal instruments (revenue side) are allocated across different (vertical) layers of the administration. An important part of its subject matter is the system of transfer payments or grants by which a central government shares its revenues with lower levels of government. Federal governments use this power to enforce national rules and standards. There are two primary types of transfers, conditional and unconditional. A conditional transfer from a federal body to a province, or other territory, involves a certain set of conditions. If the lower level of government is to receive this type of transfer, it must agree to the spending instructions of the federal government. An example of this would be the Canada Health Transfer. An unconditional grant is usually a cash or tax point transfer, with no spending instructions. An example of this would be a federal equalization transfer. This may be noted that the concept of fiscal federalism is relevant for every type of government: unitary, federal and confederal. Sharma and Valdesalici (2020) assert that the concept of fiscal federalism is not to be associated with fiscal decentralization in officially declared federations only; it is applicable even to non-federal states (having no formal federal constitutional arrangement) in the sense that they encompass different levels of government (multilevel governance) which have de facto decision-making authority. This, however, does not mean that all forms of governments are 'fiscally' federal, only that 'fiscal federalism' is a set of principles that can be applied to all countries attempting 'fiscal decentralization'. In fact, fiscal federalism is a general normative framework for assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions In 2017, Governor of Rivers State of Nigeria, Ezenwo Nyesom Wike said that he believes true fiscal federalism will "strengthen the economy of his country as all sections will develop based on their comparative advantages". These questions arise: (a) how are federal and non-federal countries different with respect to 'fiscal federalism' or 'fiscal decentralization', and (b) how are fiscal federalism and fiscal decentralization related (similar or different)? Chanchal Kumar Sharma clarifies that while "fiscal federalism constitutes a set of guiding principles, a guiding concept" that helps in designing financial relations between the national and subnational levels of the government, "fiscal decentralization on the other hand is a process of applying such principles". Federal and non-federal countries differ in the manner in which such principles are applied. Application differs because unitary and federal governments differ in their political and legislative context and thus provide different opportunities for fiscal decentralization. New generation of scholars of federalism and fiscal federalism point out that over time the theory of fiscal federalism has evolved considerably. The goal of modern fiscal federalism is not just to ensure the efficient allocation of resources, but also to protect liberty and restrain the power of government, to share legislative and fiscal competencies, to foster political participation and preserve markets.