Understanding Fiscal Federalism: Functions and Financing
Fiscal Federalism
Local finance deals with the interrelationship between various government units and substations of the internal problems of each. The first objective is the study of relations between the various levels of hacienda. It is necessary to delimit the different levels of public finances, in terms of hierarchy and in terms of choice and delimitation of the units and assign to each its appropriate powers and limitations on their income and expenditures.
Assigned Function
Goods and services are provided by the system more efficiently and cheaper, and determine the appropriate level of government. Decentralization in providing public goods would diversify the offers. The goal is to minimize the loss of welfare. Decentralization is more efficient than centralized bins for the provision of local public goods for territorial governments that are closest to the citizens of each local jurisdiction, know better their needs and is presented as a better alternative when the preferences of residents of different jurisdictions are not homogeneous.
Stabilization Function
There is less support for participation in the civil substation stabilization with respect to fiscal policy by the fact that economies are highly interdependent substations with other cause fiscal policy applied locally is rapidly blurring between all jurisdictions. And as regards monetary policy wing governments lack the substation itself unable to print money. Monetary policy is a key element in the design of stabilization policies and needs to be coordinated with fiscal policy.
Stabilization policy requires action with deficits and surpluses.
Financing Substation
Assuming the sub-central authorities to have been assigned a task and which have established levels of authority, it is necessary to decide how they are funded by these authorities. Their sources of income are three: taxes, transfers, and debt issue.
Financing Through Taxes
In countries with various levels of administration, there is the problem of the quantitative importance that taxes should be in total, and which taxes have been due to the different existing locales. Alternatives authorities, estimated at two extremes:
- The existence of separate and independent tax systems by the central government and sub-central governments.
- An income tax system which will benefit the various levels of government.
Funding by Transfers
Transfers are cash contributions that a government gives to another for this fund part of their expenses are k determine the objectives to target and secondly to decide what type of transfer is the most appropriate for each goal.
Types of transfers:
- Transfers affected or conditional or unconditional and general transfers.
- The conditional are those specified in the hard currency that the transferred funds must be spent by the receiver.
- The unconditional those that the donor does not impose any restriction of use.
- Within conditional transfers can distinguish two distinct categories, not compensatory and compensatory, the first donor transfers a fixed amount to finance a project. In compensatory transfers the contribution is a percentage of the contribution of the receiver.
Debt Financing
The issuance of public debt in the short term would be expanding the financial capacity of the decentralized levels.
The problem that provides the issuance of public debt is the debt limit.
The indiscriminate use of debt by sub-central governments may jeopardize the stabilization policy of the central government.