Lecture Public economics (5th edition) - Chapter 17: Fiscal federalism

This chapter explain why sub-national governments exist at all and compare the merits of fiscal decentralisation and centralisation; describe the Tiebout model; describe the assignment of expenditure functions and revenue sources (tax powers) to the national, provincial, and local spheres of government in South Africa; distinguish between tax competition and tax harmonisation.

• Explain why sub-national governments exist at all

and compare the merits of fiscal decentralisation and centralisation

and revenue sources (tax powers) to the national,

provincial, and local spheres of government in South Africa

harmonisation

• Explain the reasons for, and the nature of,

intergovernmental grants

and debt management at sub-national level

Fiscal Commission (FFC) in sharing revenue across the three spheres of government

government financing in South Africa

• Sub-national government

federalism

• All citizens are fully mobile

• Individuals have full information about the local public goods offered by each jurisdiction

• there is a large number of jurisdictions to choose from, spanning the full range of public

good combinations desired by

• citizens

• There are no geographic employment restrictions: people receive income from capital only

and are not tied to a

• particular location through job or family ties

• There are no spillovers across jurisdictions

• There are no economies of scale in the production of public goods.

Just as the consumer may be visualised as walking to a private market place to buy his goods, we place him in the position of walking to a community where the prices (taxes) of community services are set Both trips take the consumer to market !ere

is no way in which the consumer can avoid revealing his preferences in a spatial

economy

Tiebout, 1956: 422

• Benefit or costs of a public service spill over to non

residents

services

– Transport systems

– Water

The assignment issue

Tax competition occurs when sub-national governments adjust (lower) their tax rates to attract mobile factors of production (notably capital)

from other jurisdictions.

Tax harmonisation occurs when sub-national governments coordinate their tax policies (for instance, by limiting the degree of variation in tax

rates levied, or by defining the tax bases in a uniform way).

• Financial contagion

• Fiscal imbalances

provision

• Constitutional

– Expenditure assignment

– Revenue assignment and borrowing powers

Commission (FFC)

– Revenue sharing

– Vertical division of revenue

– Horizontal division of revenue

• Horizontal fiscal imbalances

– Urban economics.