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Is fiscal federalism
and decentralization
good or wrong?
Public Finance presentation
SGH, 21.05.2015r.
1
Definitions
Fiscal federalism, decentralization
SWOT analysisFiscal federalism


Fiscal Federalism concerns the division of public sector functions
Decentralization

is the process of redistributing
and finances among different tiers of government. It is a form of
or
dispersing
functions,
decentralization
powers, people or things away
Fiscal Federalism is concerned with understanding which
from a central location or
functions and instruments are best centralized and which are
authority.
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.
 The Theory of Fiscal Federalism considers the provision of goods financed by
taxes and the appropriate revenue collection system at the regional level.
20-05-2015 Is fiscal federalism and decentralization good or wrong?
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Fiscal constitution
SWOT analysis
Centralized vs. Decentralized expenditures
Centralized
Decentralized

Central planning

Local participatory planning

Uniformity

Diversity consistent with local

Redistribution

Economies of scale

Regional equity

Harmonization of expenditures
preferences

Incentives for competitive and
innovative service delivery

Better quality, quantity and access
of public service

Restraints against corruption

Constraints on government size
20-05-2015 Is fiscal federalism and decentralization good or wrong?
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Fiscal constitution
SWOT analysis
Centralized vs. Decentralized taxing power
Centralized
Decentralized

Efficiency in collecting

Fiscal accountability

Lower compliance costs

Better administration of taxes on

Wasteful tax competition

immobile factors
avoided

Better use of fees and charges
Discourages shifting tax

Reduced corruption
burden to non-residents

Fiscal inequity avoided
20-05-2015 Is fiscal federalism and decentralization good or wrong?
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Forms of Fiscal constitution
Unitary, federal, confederal
SWOT analysis
Unitary

148 countries

is a state governed as one single
power in which the central
Federal

45 countries (USA,
Confederal

Germany)

is a political entity
New type of confederation:
European union

is a union of political units for
government is ultimately
characterized by a union
common action in relation to other
supreme and any administrative
of partially self-governing
units, with the central government
divisions (subnational units)
states or regions under a
being required to provide support for
exercise only powers that their
central (federal)
all members.
central government chooses to
government.
delegate.
Not all federal countries are decentralized and not all unitary countries are centralized
20-05-2015 Is fiscal federalism and decentralization good or wrong?
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Map
Map of unitary and federal states
SWOT analysis
20-05-2015 Is fiscal federalism and decentralization good or wrong?
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Theory
Foundations of decentralized fiscal constitutions
SWOT analysis
Principle of Fiscal Equivalence
Decentralization Theorem
Subsidiarity Principle
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Forms ofFiscal constitution
Unitary, federal, confederal
Decentralisation Theorem
SWOT analysis
"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."
Principle of Fiscal Equivalence
The principle of fiscal equivalence implies that each level of government should finance its
assigned functions with funds it raises itself. However carried to extreme this would lead
to significant inefficiencies in tax collection from many revenue sources and distortions to
locational choices of individuals and firms.
20-05-2015 Is fiscal federalism and decentralization good or wrong?
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Forms of Fiscal constitution
Unitary, federal, confederal
SWOT analysis
Subsidiarity Principle
holds that social problems should be dealt with at the most immediate (or local) level consistent with
their solution. The Oxford English Dictionary defines subsidiarity as the idea that a central authority
should have a subsidiary (that is, a supporting, rather than a subordinate) function, performing only
those tasks which cannot be performed effectively at a more immediate or local level.
20-05-2015 Is fiscal federalism and decentralization good or wrong?
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Examples
BELGIUM
SWOT analysis
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(sub-central government) 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.
United Kingdom
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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Case studies
Decentralization inefficiency
India case
SWOT analysis
India would be much better off having a value-added tax rather than the awkward arrangement it now has
with many, distorting excise taxes. However, the central government cannot make the change because of the
decentralized structure of the country. Once again almost any change is opposed by some state. These are
not isolated examples but tell a rather common story.
Highly decentralised countries
In highly decentralized countries, such as Nigeria, Indonesia, or Russia if natural resources are discovered in
one region, problems often arise because that region will attempt to claim for its own use the revenue from
the resources discovered. This leads to political problems and, occasionally, even to wars between regions. It
also creates problems for the income redistribution role of the government. One of the major functions of a
national government is precisely to redistribute income from richer regions and individuals to poorer regions
and individuals through the broadly uniform provision of public goods and services
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Globalization
Challenges for multi-centred governance
SWOT
analysis
A nation
state is too large to address small things in life and too small to address large things
Challenges

Difusion of authority to multiple centres within and beyond nation state

Emerging source of conflict with nations

Internationalization of cities and regions

Information revolution empowers citizens and weakens authoritative control

Development of national strategies for economic and social risk management

Periodic review of jurisdictional assignments
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Sources
SWOT analysis
Thank you for your attention
Aristovnik, Aleksander. 2012 'Fiscal decentralization in Eastern Europe : trends and selected
issues', Transylvanian review of administrative sciences
King, David. 1984. Fiscal Tiers: The Economics of Multilevel Government, London: George Allen and Unwin
Sharma, Chanchal Kumar.2005 'The Federal Approach to Fiscal Decentralization: Conceptual Contours for
Policy Makers', Loyola Journal of Social Sciences
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