Fiscal federalism

Fiscal federalism studies how taxing, spending, borrowing, and transfers are divided among levels of government. It examines how these arrangements affect efficiency, equity, and accountability.

Decentralization theorem: A principle that local provision of public goods can improve welfare when preferences differ across jurisdictions and spillovers are limited. It supplies the benchmark for assigning public services to lower levels of government.
Public goods: Goods that are non-excludable and non-rivalrous, so one person's use does not diminish another's. Their benefits often cross jurisdictional boundaries, complicating which government should provide them.
United States federal grants: Financial transfers from the U.S. federal government to state and local governments, often governed by program conditions. They show how grant design can steer subnational policy while preserving local administration.
Centralization: The concentration of authority and decision-making in a central government rather than lower levels. It contrasts with distributing fiscal powers among autonomous governments.
Intergovernmental relations: The political and administrative interactions among governments operating at different levels. Fiscal rules structure a central part of these broader relationships.
Vertical fiscal imbalance: A mismatch between a level of government's spending responsibilities and its own-source revenue capacity. It explains why subnational governments often depend on transfers from central government.
Fiscal externality: A spillover in which one government's fiscal choices affect other governments' budgets or residents. Cross-border effects can make local spending or tax decisions inefficient.
Canadian equalization payments: Federal transfers to Canadian provinces intended to support reasonably comparable public services at reasonably comparable taxation levels. They are a prominent constitutionalized approach to balancing provincial fiscal capacity.
Unitary state: A state in which ultimate constitutional authority rests with the national government, even when powers are delegated locally. It provides a contrasting constitutional setting for intergovernmental fiscal relations.
Fiscal discipline: The practice of keeping public spending, borrowing, and deficits within sustainable limits. Clear revenue responsibilities can strengthen or weaken governments' incentives to control deficits.

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