Institutions of Intergovernmental Fiscal Relations

Challenges Ahead

image of Institutions of Intergovernmental Fiscal Relations

Intergovernmental fiscal institutions are the overarching framework for relations across government levels. They comprise the constitutional set up of a country; the division of power between government levels; the prevalence of fiscal rules across government levels; intergovernmental budget frameworks; the role of independent bodies such as fiscal councils in shaping fiscal relations; the inter-ministerial organisation of fiscal decision making; and other framework conditions shaping intergovernmental fiscal relations and fiscal policy. This book brings together academics and practitioners dealing with or being involved in shaping the institutions of intergovernmental fiscal relations. It has an interdisciplinary focus and provides insight from various academic or practitioners’ fields: economists, political scientists, budget management specialists and others.



The role of intergovernmental fiscal institutions: The case of tax sharing

In the literature on fiscal decentralisation – both the first generation and second generation theories – a critical assumption made is that local governments have taxing power over local taxes. Another assumption is that a clear distinction exists between local taxes and intergovernmental grants. Tax sharing, which is widely adopted in the world except in a few countries such as the United States and Canada, makes such assumptions invalid. Tax sharing links the budgets of the central and local governments in a complicated way and creates conflicts of interest among different levels of government. It also may lead to an inefficient tax mix and higher national debt. Compared with the cases where the assignment of tax and expenditure responsibilities are clear cut, understanding the interrelationship between tax sharing, fiscal institutions, and the political system is critical for the success of fiscal decentralisation.


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