The Practice Of Fiscal Federalism: Comparative Perspectives

A GLOBAL DIALOGUE ON FEDERALISMThe Practice of Fiscal Federalism: ComparativePerspectivesDRAFT THEME TEMPLATEGENERALThis theme is concerned with the practice of fiscal federalism. Fiscal Federalismis concerned with economic decision making in federal system of government inwhich public sector decisions can be taken at various orders of government. Theoverriding issue in fiscal federalism is referred to as the assignment problem, thatis the assignment of taxation, expenditure and regulatory responsibilities tovarious orders of government. The way in which assignment function is resolvedthen determines the sort of fiscal relations that should exist between orders ofgovernment. Intergovernmental fiscal relations include the structure of transfersbetween orders of government, the division of the tax room, and any requirementfor one order of government to assert influence over the decisions taken byanother by financial means. The decentralization of functions also gives rise toboth the desire and the opportunity for different governments to coordinate orharmonize their policies. Such coordination can occur horizontally amonggovernments at the same order, or vertically between governments at differentorders. The emergence of a new “borderless” world economy and internalconflicts in some countries complicates this picture by bringing new challenges toconstitutional federalism. These challenges arise from the decline of nation statesin carrying out regulation of certain economic activities as borders have becomemore porous and information technology has weakened their ability to controlinformation flows. With globalization, it is increasingly becoming apparent thatnation states are too small to tackle large things in life and too large to addresssmall things. Internal conflicts are motivating some unitary countries to examine“federal” options to deal with ethnic and regional conflicts.Various federal countries differ a great deal in their choices as to the character offiscal federalism i.e. various tiers and their responsibilities and the associatedfiscal arrangements. This diversity of experiences offers a tremendous opportunityfor these countries to learn from each other’s experiences in strengtheningresponsive and accountable governance and even to be inspired from innovativepractices. In this context, the proposed theme on fiscal federalism, would serve asa critical element of the global dialogue on federalism in advancing learning bothfrom successes and failures in other federal countries.

A Global Dialogue on FederalismFiscal Federalism Theme ProposalThe purpose of this theme is to examine the range of fiscal institutions used in 12very different federal or federal-type countries and one quasi-federal largecountry; to consider their rationale and effectiveness; to explore theirinterrelationship with federalism. Consistently with the purpose of the globaldialogue, to assist countries to learn from each other's experiences, countrychapters should explain not only the formal institutional arrangements but alsotheir operation in practice, to enable them to be adequately understood. Thistemplate provides a guide to the information that each chapter should contain.Questions that are irrelevant to any country should be ignored. If the templateomits questions relevant to a particular country, however, or takes an undulynarrow perspective, please let the theme coordinator (ashah@worldbank.org)know, so that the template can be adjusted accordingly, to make the outcomes asuseful as possible. Views in various sections should be based upon the consensusreached in the country dialogue and should not be the personal opinions of theauthors. Note that each chapter including tables and annexes should not exceed10,000 words.Section 1. Introductory Overview of the Country Briefly describe some key features of the country, to assist understandingof your chapter. What is its population size? What is the populationcomposition in terms of ethnic origin, religion, language, culture, etc. anddistribution across constituent units. What is the size of its territory? Arethere any characteristics of the territory relevant to the structure andoperation of the federation? How many constituent units are there? Howdo they compare to each other, in terms of size, wealth and nationalinfluence? Any aspect of history and politics that may be relevant forunderstanding the fiscal institutions.Briefly describe some key features of the system of government. Does itrely exclusively on representative government, or is there an element ofdirect democracy? Is it a republic, or is there still some form of monarchy?How does the political party system work? Are there any dominatingparties which alternate in power? Is the legal system based on the commonlaw, on civil law, on another legal system or on a combination ofinfluences? Is the system of government stable, recently established, orunsettled? How are the sub-national governments (executives andcouncils) chosen – through direct elections, indirect elections orappointments?Provide a very brief overview of the institutions of government that existin this country, to enable the more detailed material that follows to be putin context.How is the government held accountable to citizens? Any social normsand restraints on the role of governments? Institutional arrangements –legislative, legal framework, judicial, civil society etc to provide oversightof governments? Provisions for direct democracy, referenda? Citizens’2

A Global Dialogue on FederalismFiscal Federalism Theme Proposal charter? Protection of minorities and ethnic groups against governmentabuses?Provide basic economic indicators such as growth rate, composition ofeconomic activity, trade patters, reliance on natural resources, debt burdenand external constraints.Section 2. The Structure of Government and Division of Fiscal Powers Briefly describe the federal model. What are the constitutional orlegislative divisions of fiscal powers among federal, state and localgovernments? (Are local governments hand-maiden of theprovinces/states?) How are these powers exercised? What are thedeviations in de-jure vs. de-facto responsibilities?What is the current assignment of spending and regulatoryresponsibilities? Please provide details by each sub-function outlining bothregulatory and executive implementation responsibilities.Does the division of powers follow subsidiarity principle i.e. decisionmaking with government closest to people unless a convincing case forhigher level assignment? If not what are the underlying bases? For whatfunctions, there is harmony in intergovernmental relations? For Whatfunctions, there is disharmony and why and how to overcome it?What are the common values – vertical equity, horizontal equity, relativeemphasis on social services and military spending, access to the poor anddisadvantaged groups, protection of women and minorities, support foraffirmative action. How are the tradeoffs between equity and efficiencyand growth evaluated? Views about the role of the public sector andprivate market solutions to public services? Political taste for solidarityand equalization across jurisdictions?What are the channels of federal influence on sub-national policies andvice-versa? Do higher level governments have the opportunity to intervenein spending decisions at lower levels?What are areas of fiscal conflicts among different orders of government inthe federation? What are the institutional arrangements to deal with theseconflicts?Describe the extent and nature of asymmetry among sub-nationaljurisdictions – and any resulting asymmetry in fiscal arrangements (e.g.between states/provinces and “territories”).What is the constitutional/legal status of local governments? What is theinstitutional structure of local governments? How are local governmentsorganized for metropolitan, urban and rural services? Is home rulerespected? How oversight is exercised over local governments?3

A Global Dialogue on FederalismFiscal Federalism Theme Proposal What are the institutional rules for securing common economic union e.g.constitutional or legal provisions preventing discrimination or barriers totrade and factor mobility by sub-national units? What are the concernsregarding internal impediments to economic union?Section 3. Fiscal Federalism and Macroeconomic Management What are the institutions of economic and fiscal policy coordination?What is the institutional framework for monetary policy? Is the centralbank independent of national government? Does the central bank havea narrower mandate of price stability alone or a wider mandate? Whatare the concerns regarding monetary policy issues?What is the institutional setting for fiscal policy? How is fiscal policycoordinated among constituent units? Are soft budget constraints amatter of concern? Has there any fiscal responsibility legislationembodying fiscal rules for fiscal discipline and coordination? What isthe framework for debt management? Are there any rules for creditallocation among constituent units? What are the concerns regardingfiscal discipline and fiscal policy coordination?Section 4. Issues in Revenue Raising Responsibilities What are the current assignments for raising revenues at various orders,federal, intermediate and local – who determines the base and rates andwho collects revenues? Are there any tax collection agreements? Are thereany joint taxes? Are there any tax base sharing arrangements?Are there any special issues in financing local and metropolitan servicesand rural services?What is the degree of tax autonomy at sub-national orders? What are thecurrent issues in tax assignment and tax administration? Is the tax systemharmonized? What are the tax administration difficulties faced by subnational orders? Is there any concern that tax competition may lead to arace to the bottom? Any inter-jurisdictional conflicts in taxingenvironments and natural resources?Section 5. Fiscal Equity and Efficiency Concerns and IntergovernmentalFiscal Transfers Are there vertical and horizontal fiscal gaps and how are these overcome?How are the fiscal transfers structured? Please provide a taxonomy ofgrants – general purpose, specific purpose – matching and non-matchingand their relative importance in national and subnational budgets. Are thedesigns consistent with objectives?4