fiscal federalism

Syllable breakdown

Dictionary meaning

the study and practice of the financial and budgetary relationships between different levels of government in a federal or multilevel governance system, addressing questions of which level of government should raise which taxes, spend on which public services, and how financial transfers — grants-in-aid, revenue sharing, equalisation payments — should flow between levels to correct for fiscal imbalances; the normative theory of fiscal federalism, developed by economists including Richard Musgrave and Wallace Oates, suggests that stabilisation and redistribution functions should be centralised because subnational governments cannot effectively manage macroeconomic shocks or redistribute income if residents can move, while allocation of local public goods should be decentralised to match provision to the preferences of local populations; in practice fiscal federalism involves complex political negotiations about the distribution of taxing power and spending responsibilities

Examples

• Fiscal federalism in Australia includes a system of vertical fiscal equalisation grants that transfer revenue from Canberra to the states.
• Debates about fiscal federalism in the European Union centre on whether the EU should have greater fiscal capacity to stabilise member state economies during crises.