Rethinking the Assignment of Expenditures and Regulatory Responsibilities

This paper focuses on the provision by governments, central or subnational (SNG), of services to their residents through three means: budgetary expenditures and thus provision, with either public or private production; tax expenditures encouraging private production; and regulatory requirements imposed on private agents to produce some services. Two issues are examined. First, how to update/adapt if necessary the foundational prescriptions of First Generation Fiscal Federalism (FGFF). Second, should the various micro and macro concerns of the Second Generation Fiscal Federalism literature (SGFF) be incorporated into the operational prescriptions of the FGFF. The first part of the paper does two things. First, it revisits the FGFF literature and, second, it examines a variety of changes and challenges (climatic, demographic, technological,É) that could require adapting the FGFF framework. The second part of the paper examines various SGFF writings then links them to the FGFF operational prescriptions. It starts with micro issues - heterogeneity of preferences, externalities and economies of scale then turns to macro issues. The third part of the paper sets forth eight recommendations for practice- based fiscal federalism. The conclusion is that the FGFF rules still hold; societal changes and SGFF concepts simply modify at the margin the benefits or costs of a given devolution choice.