Fiscal Decentralization and Fiscal Federalism Ind. David Slavata, Ph.D.

Decentralization of General Government Central Government Impact of its political power to all the country State Government (province, kanton, region, republic, prefecture) The biggest geographical area, which the country is divided Local Government Its legislative and legal competences is limited by the smallest area for administrative and political purposes

The Decentralization Political Decentralization It allows to citizens to participate on the public interest and to create public policies. Administrative Decentralization Transfer of responsibility from central governemnt to state or local governments for planning, financing and managing some of public function. Fiscal Decentralization It is distribution of finance between each levels of General Governemnt. Transparent, predicable, It is the right to gain its own revenues, it is the right to make expanditure decisions

Fiscal Federalism definition Understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government (Oates). It is the system which allows to different groups of entities in different states (federal states) to express different preferences regarding of public goods, which leads necessary to differences in the level of taxation and public services (Musgrave).

Fiscal federalism theories - historical view First Generation Theory of Fiscal Federalism - 50´s and 60´s of 20th centuryThe politics are trying to maximalize the utility of their voters. The only function of public sector is to remove the market failures Second Generation Theory of Fiscal Federalism The politics and voters are trying to reach its own aims. The politics may not track only the welfare of voters. The role of perfect awareness. The optimal decission are possible to make only under the condoition of perfect (symetric) information. Present decentralization tendences Democratization of society (entities in regions are more powerfull) Globalization (decreasing dependance on Central governemnt due the globaliaztion) Decentralization as superior good Increase of inter regional diferencies

Theories as Basis of Decentralization Location Theory Tiebout´s model Teory of clubs Fiscal equivalence Principal of Subsidiarity

Location Theory Households who buy products have to add to their price also the transportation costs and the costs of waste of time. Optimal size of local government to be effective should respect: Transport cost Demand for regional product Population density Economies of scale Economies of scope

Tibout´s Model The administrative units are in competition to provide optimal services and goods to its voters and it creates the optimal effectiveness. Voters can change their place of residence at any time according to the size and structure of the public good. Equilibrum is the situation when each individuals gain required level of public goods and changing of his residency does not help him to get better position. The limits of the theory: Voters must be mobile and change their residency in any time Voters know the differencies between revenues and expanditures of each local governemnts There are many of local governments among which voters can choose All voters have the same income There are no positive and negative externalities