INTERROGRATING FISCAL FEDERALISM: ISSUES OF ALLOCATION AND DECISION MAKING IN FEDERALISM

Abstract

A study on federalism cannot be complete if fiscal relations between tiers of government is ignored. Federalism and fiscal federalism are without any doubts siamese twins: one cannot do away from the other. Fiscal federalism is a means through which federation resolves the problem of (resource) allocation. The study investigated how the problem of financing is being addressed at different levels of government, and the relationship between federalism and fiscal policies. The study also examined how fiscal constraints can undermine or strengthen federalism, how they favour decentralization or centralization, and finally, how federal fiscal policies affect decision making structures. We contended that fiscal decentralization is essential to enhance not only the fiscal capacity of subnational governments but also public accountability. The idea behind fiscal equivalence is to ensure that acceptable standard is erected in designing fiscal allocations among the federal systems. Indeed, the main functions of federal jurisdiction are macroeconomic stability and reduction of fiscal variation among lower level jurisdictions through redistribution of wealth to reduce the gap between the rich and poor constituent units. And the essence of fiscal equalization policy is to advance the equality among citizens irrespective of the local jurisdictions they are resident by reducing the gap between the wealthy and poor regions for optimal welfare gains in the whole federation. The study therefore submitted that equalization policy should be incentivized to avoid fiscal commons or fiscal incapacity among subnational jurisdictions. The study also advanced for cooperative approach to addressing issues of corruption and access to credit markets rather than centralization, which may undermine the autonomy of subnational government especially due to partisanship and reckless exercise of discretionary power by central government.