Federalism, fiscal centralization and partisan competition.

Abstract

Deciding how to finance multiple levels of government is a challenging task for all political systems. Federal states, in addition, have a constitutional contract to divide financial accountability across federal and state/regional/provincial governments. In comparison with unitary states, federal states are arguably more committed to fiscal decentralization precisely because of this constitutional contract. Nevertheless, a wide variation in the extent of fiscal centralization is observed even among developed federal states. This study explores the political economy of fiscal centralization in six developed federal states, Australia, Canada, Austria, Germany, the United States, and Belgium, from 1961 through 1995. Fiscal centralization is always more than just an economic decision. Without taking the political dimensions of fiscal centralization into account, the conventional measure of fiscal centralization treats expenditure and revenue components exchangeable. Although closely related, revenue- and expenditure-side fiscal centralization connotes different political ramifications because different parties care about different fiscal priorities. In this study, I examine whether partisan competition across different levels of government can account for the observed variation in the direction and the magnitude of this bifurcated fiscal centralization among the six federal states. However, not every intergovernmental partisan competition is equally powerful in its impact on fiscal centralization. Some second chambers function as an effective arena for state/regional/provincial interest representation. Additionally, some federal states have influential extraconstitutional institutions specialized in dealing with intergovernmental relations matters. This study explores how institutional-structural diversity in federal systems interacts with intergovernmental partisan competition to influence fiscal centralization. In so doing, this study integrates three distinct approaches to fiscal decisions, namely institutional-structural perspectives, partisan inclinations, and fiscal-federalism arguments. I also propose an alternative measurement of aggregate subnational partisanship, which is more theoretically pertinent to the nature of subnational legislatures than the conventional counterpart. By broadening the concept of fiscal centralization and by relating it with political factors, this study contributes to ongoing debates on federalism.