Measurement, Determinants and Effects on Country Stability
Studies in Fiscal Federalism and State–local Finance series
Edited by Núria Bosch, Marta Espasa and Albert Solé Ollé
Chapter 2: Inter-regional Fiscal Flows: Measurement Tools
Giuseppe C. Ruggeri INTRODUCTION 1 Two fundamental functions of government are to mitigate fluctuations in economic activity (stabilization) and to reduce inequality of opportunities and outcomes among individuals and families (redistribution). In unitary states these functions are performed by one order of government, although programme delivery may be decentralized. In federations, both federal and regional (states or provinces) governments perform these functions. Moreover, federations usually incorporate inter-governmental fiscal relations to address regional differences in size, resource endowments, economic performance, and fiscal capacity. The fiscal relationship between federal and sub-national governments raises three main equity issues. First, does the federal fiscal system reduce regional economic disparities (regional development and inter-regional redistribution)? Second, does it restore a reasonable balance between the revenue-raising powers and spending responsibilities of the federal government and the regional governments combined (vertical fiscal balance)? Third, does it reduce fiscal disparities among regions (horizontal fiscal balance)? This chapter addresses primarily the first question. The change in the relative economic position of different regions due to federal fiscal activity may be called inter-regional redistribution. It differs from income redistribution because it compares average income levels among regions rather than income levels among individuals, regardless of their place of residence. While the two concepts are related – a province with a larger share of low income residents will likely have a lower average income – they address different issues within a federation. All items in the federal revenue structure can potentially generate interregional redistribution. Federal spending comprises two major groups: (1) programmes delivered...
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