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.
This may be noted that the concept of fiscal federalism is relevant for every type of government: unitary, federal and confederal.[1] Sharma and Valdesalici (2020) assert that the concept of fiscal federalism is not to be associated with fiscal decentralization in officially declared federations only;[2] 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.[3]
Fiscal Federalism In Nigeria Pdf Free
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'.[4] 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 [5]
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".[6] 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 [7] 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".[8]
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.[10]
The concepts of fiscal federalism are related to vertical and horizontal fiscal relations. The notions related to horizontal fiscal relations are related to regional imbalances and horizontal competition. Similarly the notions related to fiscal relations are related to vertical fiscal imbalance between the two senior levels of government, that is the centre and the states/provinces. While the concept of horizontal fiscal imbalance is relatively non controversial (as explained above), the concept of vertical fiscal imbalance is quite controversial (see Bird 2003[11])
The VFI-VFG-VFD offers a nice framework to understand and debate issues surrounding fiscal federalism. VFD is a concept that has entered the lexicon of fiscal federalism and has the power to clarify the debate on intergovernmental financial relations.[13]
The provision of local public goods by local governments is not always optimal and sometimes federal intervention may be required. The question of which activities should take place at which level of government is called optimal fiscal federalism.[20] Reasons, why federal government might intervenes to the provision of public local goods include market failures and redistribution. Market failures occur because actions of one community have effects on the others (externalities) and similarly as in the market with private goods, competition is not perfect, because there is always a limited number of communities. The problem of redistribution is that with free migration and local competition communities will not redistribute income (to individuals or between communities) or, at most, the redistribution will be limited. From this reason, redistribution is performed by the higher levels of government.[21]
Fiscal Federalism attempts to define the financial relationship between federal or central governments and state and local governments. Using fiscal federalism, the national government can balance out issues the distribution of wealth and resources among the lower levels of government. In 1959, Economist Richard Musgrave created the theory of Fiscal Federalism in his research work Theory of Public Finance.
Several events modernized fiscal federalism in the U.S. It was the Morrill Act of 1862 that increased the prominence of Fiscal Federalism in the United States. The 16th Amendment increased government revenue by taxing income, providing more resources to share in the form of grants. FDR's New Deal programs expanded the national government's scope of influence in state and local programs. Lyndon B. Johnson's policies of The Great Society ramped up Fiscal Federalism in the United States during the 1960s. The benefits of fiscal federalism are consideration of local and state governments, less overall planning, and decreased administrative costs. The drawbacks of fiscal federalism are lack of state and local government accountability, deficiency of staff to manage federal programs, and strained relationships between the levels of government.
The purpose of fiscal federalism is to establish a system to share funds with the different levels of government. Fiscal federalism's purpose is to help spread funds where it is needed throughout a nation.
At its most basic level, fiscal federalism attempts to define the division of governmental functions, and the financial relationship between, different levels of government (usually how federal or central governments fund state and local governments).
Imagine a Leave it to Beaver scenario: fiscal federalism might involve Dad (the federal government) making money, then handing it over to Mom (the state government) to distribute as she sees fit based on the needs of the family (the people) to buy groceries, pay the rent, give the kids allowances, go to the doctor, and so on (programs like government housing and health care).
What is fiscal federalism in politics? The fiscal federalism definition is a multi-layered local, regional, and federal economic allocation policy. Federalism refers to the sharing of powers at various levels of government usually at the local, state, and national levels. Fiscal federalism focuses on government taxation and government spending to assist government operations at any level. Fiscal federalism works when the central or national government uses tax revenue to share with the lower levels of regional and municipal governments. The central government can do this through grants or transfer payments.
The concept of fiscal federalism emerged in governments mostly in the modern era of republics and democracies. Fiscal federalism was made popular through work by Richard Musgrave, who developed the theory in 1959. Richard Musgrave was a German American economist who published a research paper on the Theory of Public Finance. His research described the need for public finance, including government taxation and spending policies.
Fiscal federalism in the United States is the financial relationship between the federal government and the state or local governments. According to the theory of fiscal federalism, the central government has the responsibility to share funds with the lower levels of government. This is so the federalism system continues to work and the relationships between the levels of government are understood. If the central government needs a policy passed in the states, they can do so by enacting fiscal federalism policies to help implement the new policies. There are several federal acts that have modernized the fiscal federalism policies in history:
The theory of fiscal federalism was originally developed by German-born American economist Richard Musgrave in 1959. Musgrave argued that federal government systems have the ability to solve many of the issues local governments face by providing the balance and stability needed to overcome disruptive issues like uneven distribution of wealth and lack of widely available resources. Musgrave further theorized that federal governments should manage a nation's money from the top and give it to states, who can distribute it locally as needed. 2ff7e9595c
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