Fiscal Equalisation and the Soft Budget Constraint
AbstractThis paper assesses the interactions of horizontal fiscal equalisation schemes with debt policy by sovereign regional governments. Local public goods are either financed by debt or taxation. A horizontal equalisation scheme eleviates regional public revenue disparities under horizontal and vertical tax competition. We show that fiscal equalisation schemes have no impact on the optimal central government grant whereas they can either soften or harden the regional budget constraint depending on the specific formulae. Revenue equalisation softens the budget constraint whereas tax base equalisation hardens the budget constraint of poor states. --
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Bibliographic InfoPaper provided by University of Cologne, FiFo Institute for Public Economics in its series FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge with number 08-8.
Date of creation: 2008
Date of revision:
Fiscal federalism; public debt; soft budget constraint; fiscal equalisation; tax competition;
Find related papers by JEL classification:
- H7 - Public Economics - - State and Local Government; Intergovernmental Relations
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-01-03 (Accounting & Auditing)
- NEP-ALL-2009-01-03 (All new papers)
- NEP-CBA-2009-01-03 (Central Banking)
- NEP-MAC-2009-01-03 (Macroeconomics)
- NEP-PBE-2009-01-03 (Public Economics)
- NEP-URE-2009-01-03 (Urban & Real Estate Economics)
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