Lec 2 Fiscal Federalism

1. Fiscal Federalism
(Continued,,,)

2. Centralization vs
Decentralization

3. A simple way to understand if an government is
working in a centralized or decentralized manner is by
looking at two important aspects:
• The place of the decision-making authority in the
hierarchy of the management i.e. Centralized.
• The degree of decision-making power at the lower
echelons in the government i.e. Decentralized.
Centralization vs Decentralization

4. Decentralization
A decentralized government is one for which a number of
small autonomous government join together to form a
federation of states or governments.
A central or federal government usually exists to co-ordinate
the activities of the smaller local governments. Example: In
UK, 60% of local government expenditure is financed from
grants-in-aid received from central government.

7. Advantages of decentralization
It offers a greater choice between
different amounts of public goods.
Improve resource allocation in
public sector

11. Disadvantages of decentralization
• Macro economic stabilization function and
redistribution of income and wealth policies of
government are not better carried out.

12. Financing Local
Government

13. Financing Local Government
• The Tiebout model of the public sector stressed
decentralization and limited the regional provision of
public goods to those which could be easily
internalized for a region.
This approach gives a strong theoretical presumption in
favour of financing state and local functions primarily
with benefit taxes.

14. Financing Local Government
Mulure (1971) has summarized this approach as:

16. “Shamaila Zareen” is discussant of
this topic. She will further discuss
this topic in class.