Budget federalism, Essence of budgetary federalism - Finance, money circulation and credit

Budget federalism

As a result of studying the chapter, the student must:

• Know the basics of budget federalism;

• Know the principles of building a budget federalism;

• understand the essence of competing and cooperating federalism;

• have an understanding of foreign models of fiscal federalism;

• Know the peculiarities of the Russian model of budgetary federalism.

The essence of budgetary federalism

Budget federalism is the distribution of the monetary incomes and expenditures of the country between the federal budget, the budgets of the US subjects and municipal budgets, taking into account the sources of income and the planned expenditures of the federal, subfederal and municipal levels.

As in federated states the role of the state is differentiated at several levels, each of which is represented by the authorities as its representatives, there is a need to divide powers between different levels of power.

The state creates a legal environment for the functioning of a market economy, being a supplier of public goods and services. Thus, it affects the allocation of resources in the economy, redistributes income among individuals, stabilizes the economy and the financial system, and contributes to economic growth. Realization of these functions is carried out first of all at formation and execution of budgets. Fiscal tools should provide the authorities with the necessary resources to carry out public functions, can be used for anti-cyclical stabilization and economic growth policies, and also perform tasks for some leveling of incomes.

The most important characteristic of the public finance management system is the budgetary structure and nature of fiscal relations between different levels of government. The management of public finances, in the presence of many unified principles and methods, is carried out separately at each level of government and in each jurisdiction (territorial-public education). Explain the relationship between the levels of the budget system and determine the ways of their most rational construction is called theory of the budget fiscal federalism. Federalism in this case means having at least one separate budget level at the subnational level.

The fundamental works of Chiba Tibu, R. Musgrave and U. Oates formed the basis for the theory of budgetary federalism, which by the early 1970s. was formed as an independent direction of the theory of public sector economics.

In the broadest sense, using the concept of "federalism" characterize the relationship between any elements that have a certain independence and are based on voluntariness, compromise, commonwealth ". These elements were understood as political entities (I. Altuzis), equal states (Sh. L. Montesquieu), independent production consumer communes (P.J. Proudhon), etc.

However, the greatest theoretical and practical development of federalism was received as a basic category of formation of state entities based on mutually beneficial relations between the central government and territorial (state) entities that have a certain independence and express the interests of the population that they represent, with the dominant position of the federation in resolving nodal questions in the activities of the state.

The federal system is a complex type of public education. The dispersal of power and the refusal of the center from the monopoly of coercion are fraught with inconsistencies in the regulatory and fiscal decisions of the authorities at different levels. In these conditions, effectiveness directly depends on the degree of coordination of interests of all levels of government, business entities and the population. In addition, the content of additional authorities requires, other things being equal, additional costs. However, with & quot; agreed federalism & quot; the efficiency of the functioning of the public sector is more significant than in countries in whose state structure the mechanisms of unitarism predominate.

The theory of fiscal federalism is based on the so-called decentralization theorem, formulated by US economist W. Oates.

For local public goods consumed by a geographically localized population, and for which the costs of production are the same and equal to the costs of the central government, it is always more efficient when they are secured at the local level . Subnational authorities, getting more complete information about the needs of the population, have more opportunities to realize the optimal balance of tax burdens and public goods. In other words, the level of power closest to consumers of budgetary services is able to ensure the most effective expenditure of budgetary funds. Thus, a pareto-efficient level of production is achieved, which central authorities can not provide if the following conditions are met:

- the costs of providing public services are the same for central and subnational levels of government, i.e. there is no economies of scale;

- Public goods produced in the territory of a particular jurisdiction are fully consumed by the population of this jurisdiction, i. no external effects;

- the preferences of the local population are very different (local needs can lead to a significant increase in the cost of centralized provision of public services).

There are also a number of studies showing a positive link between fiscal decentralization and public sector efficiency, economic growth, and a decline in inter-regional disparities in living standards.

In addition to the obvious advantages, fiscal decentralization also has negative consequences:

- an imbalance between the resources available to the subordinate authorities and the spending powers assigned to them (vertical imbalance of the budget system);

- the interregional differentiation of net fiscal benefits - the difference between the volume of benefits obtained from the provision of subnational public goods and the level of tax payments (violation of the principle of territorial fairness);

- the presence of horizontal fiscal externalities associated with the desire of regional and local authorities to achieve their own goals at the expense of other territories (the manifestation of externalities of this kind is associated with unfair tax competition, export of the tax burden).

Thus, the essence of fiscal federalism is that decisions taken at each level of government on the provision of public services should reflect the preferences of the population of the corresponding territory.

In this context, fiscal federalism as a principle of public finance management implies:

- at least two levels of government that exercise their authority with respect to the same territory and the same population;

- at each level, at least one field of activity in which it is completely autonomous;

- guarantees (at least in the form of simple declarations in the constitution) of the autonomy of each level of government in their own sphere.

Based on the criteria of the scale of jurisdiction and the susceptibility of the country's economy to external factors, we can conclude that functions such as stabilization (anti-cyclical economic policy) and redistribution (fight against poverty) are more suitable for the central level of power and should be conducted centrally. At the same time, the allocative function associated with the allocation of resources and the satisfaction of needs for public goods (goods and services), and the organization of production of these benefits, can be performed both centrally and decentralized.

By highlighting the most significant aspects of the phenomenon under consideration, we define fiscal federalism as the relationship between the federal authorities and the authorities of the subjects of the federation (in accordance with this within the subjects of the federation with local governments) budget rights and powers, expenditures and incomes, as well as distribution and redistribution of the latter between the federal budget and consolidated budgets of the subjects of the federation, based on mutually beneficial words, to the extent of ensuring the unity of the national interests and the interests of the population living in the territories of subjects of the federation and their member municipalities.

Thus, the main thing in budget federalism is relations based on mutually beneficial conditions in the intergovernmental sphere, implying a balance of centralism and decentralism in all spheres and maximally satisfying all the needs of the population in public goods. Since relations can not be completely mutually beneficial, fiscal federalism is expressed in step-by-step agreement of interests between the federation, territorial communities and the population. And apparently, the number of contradictions, and hence the speed of this process in a reformed, transitional society will be much higher than in a stably democratic one. But, as the world experience shows, even in the most developed society this process does not stop, because there is no single code, forever established law. The rules of a hostel in a single state vary depending on the balance of forces, historical, economic and other factors. And the methods are more diverse, they differ from formalized legitimate procedures: political and economic pressure, use of administrative resources, national maps, etc. The formation of an effective system of fiscal federalism in each country is usually carried out by trial and error and very often contradicts the optimal theoretical structure.

The construction of fiscal federalism is based on the following principles:

- multiple levels of the budget system;

- a combination of national interests and interests of the population of territorial entities as the basis of budgetary policy at all levels of government, including intergovernmental relations;

- a combination of the principles of centralism and decentralism in the delimitation of authority, expenditure and revenue;

- ensuring minimum budgetary resources at the subnational level through their distribution and redistribution on an objective basis;

- a high degree of independence of budgets, while maintaining the dominant position behind the state level (the federal center) in solving key issues in the activities of the state;

- active participation of territorial authorities in the formation and implementation of the state's fiscal policy;

- the legal consolidation of the responsibility of the authorities of each level for non-observance of certain social and economic functions;

- Equality in interaction with a higher budget.

In recent decades, an increasing number of countries, regardless of the state system (federal or unitary), is forming its budget structure on the basis of the relative budgetary autonomy of subnational levels of power. Such a budget device was called "budget federalism".

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)