Fiscal federalism is defined as the analysis of how instruments and functions are best centralized and best devolved in different levels of governance. It offers an outlook on the problems that arise from and rise due to the existence of more than one level of government. The responsibility of the central government, as per the basic fiscal federalism theory, is to ensure equitable distribution of income, maintenance of macroeconomic stability and provision of public goods. To be effective, each jurisdiction should be mapped out in terms of resource endowment, population size and general regional development (Rodden, 2003).
The fiscal federalism offers a clear insight on how the budget and finances in a state should be evolved. The public finance should be managed properly to ensure fiscal federalism is indeed effective. This is through broad consensus where the highest level of government should be tasked with crafting stabilization and distributive fiscal policies .The fiscal federalism should address the expenditure assignment which sets up the spending programs in the different levels of government (Rodden, 2003). The expenditure is a core part of a budget and should be managed in order for a budget to be sustained.
The revenue assignment is considered in a fiscal federalism as it expounds on the responsibility of levying and management of taxes. An efficient governance will ensure that taxes are levied in rates that can sustain the budget and financial demands of a devolved government. The revenue collection role through federalism ensures different levels of government are well equipped with proper systems and policies that can net much revenue.
The federal governments should uphold their fiscal efficiency by mitigating vertical imbalances between expenditure and revenues. The fiscal federalism offers a platform on how to offset imbalances in financial needs and capacity to meet them. The budget, under a fiscal federalism, is affected by these factors and maybe subject to change due to the ever changing financial parameters (Rodden, 2003).
References
Rodden, J., Eskeland, G. & Litvack, J. (2003). Fiscal decentralization and the challenge of hard budget constraints. Cambridge, Mass: MIT Press.
