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This paper discusses how decentralized countries can achieve sound fiscal relations between the central government and lower government levels. The concepts of “vertical gap” and “vertical balance” provide an analytical framework for identifying and addressing key challenges. These concepts can help policymakers ensure that the financing of subnational governments (composed of transfers received from the center, own revenues, and borrowing) is both efficient and adequate given the allocation of spending responsibilities. More generally, the paper offers some perspectives about the optimal design of decentralization systems by examining the sequencing and economic principles underlying revenue and expenditure assignments, the use of transfers, and borrowing.

Intergovernmental fiscal relations --- Decentralization in government --- Federal-state fiscal relations --- Fiscal relations, Intergovernmental --- State-local fiscal relations --- Federal government --- Finance, Public --- Local finance --- Law and legislation --- Labor --- Macroeconomics --- Public Finance --- Structure, Scope, and Performance of Government --- State and Local Government --- Intergovernmental Relations: General --- State and Local Taxation, Subsidies, and Revenue --- State and Local Budget and Expenditures --- State and Local Borrowing --- Intergovernmental Relations --- Federalism --- Secession --- National Government Expenditures and Related Policies: General --- Fiscal Policy --- Taxation, Subsidies, and Revenue: General --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Public finance & taxation --- Labour --- income economics --- Expenditure --- Revenue administration --- Public employment --- Fiscal stance --- Fiscal federalism --- Fiscal policy --- Expenditures, Public --- Revenue --- Economic theory --- Canada --- Income economics

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

This paper discusses how decentralized countries can achieve sound fiscal relations between the central government and lower government levels. The concepts of “vertical gap” and “vertical balance” provide an analytical framework for identifying and addressing key challenges. These concepts can help policymakers ensure that the financing of subnational governments (composed of transfers received from the center, own revenues, and borrowing) is both efficient and adequate given the allocation of spending responsibilities. More generally, the paper offers some perspectives about the optimal design of decentralization systems by examining the sequencing and economic principles underlying revenue and expenditure assignments, the use of transfers, and borrowing.