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“Analysis on Main Advantages and Disadvantages of Devolution and Fiscal Federalism: Is a Hybrid Solution the Cure?”

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“Analysis on main advantages and disadvantages of devolution and fiscal federalism: is a hybrid solution the cure?”

All countries in the world, regardless their degree of development, size, complexity or their form of government, must tackle an important choice when it comes to decide how the power is distributed between the central government and the sub-national entities who exercise governmental functions at local level. The two possibilities at the end of the spectrum, i.e.: complete decentralization of powers to local bodies on the one hand and total centralization of administrative and fiscal powers in the central government on the other hand, are often not feasible since both entail downsides that could hinder the sound functioning of the country.

The federal system has been applied extensively throughout history, even though with certain modifications and adaptations, in several countries, such as the US, Canada, Germany and Switzerland. It is based on the existence of a principal-agent relationship between central government and a network of decentralized sub-national entities. The latter act as agents on behalf of the central government and they are responsible of carrying out governmental tasks and responsibilities at a local level.
In particular, federalism can be extended and applied to fiscal powers, allowing local governmental authorities to retain part of the revenues stemming from tax collection instead of just collecting for the central government, which eventually will transfer back the revenues to the local authorities to meet their expenditures.
Fiscal devolution and the possibility for local governments to decide how to use tax revenues (i.e.: regional spending power) could reduce principal-agent issues and pose a wide array of benefits for sub-national governments. In fact, the latter are now incentivized to collect taxes since the…...

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