Fiscal Equalisation and the Soft Budget Constraint

Robert C. Plachta

No 08-8, FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge from University of Cologne, FiFo Institute for Public Economics

Abstract: This 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.

Keywords: Fiscal federalism; public debt; soft budget constraint; fiscal equalisation; tax competition (search for similar items in EconPapers)
JEL-codes: E62 H7 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-acc, nep-cba, nep-mac, nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:uoccpe:7451

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