The power of the purse : what do the data say on US federal budget allocation to the states?

This paper provides new evidence on the determinants of the allocation of the US federal budget to the states and tests the capability of congressional, electoral and partisan theories to explain such allocation. We find that socio-economic characteristics are important explanatory variables but are not sufficient to explain the disparities in the distribution of federal monies. First, prestige committee membership is not conducive to pork-barrelling. We do not find any evidence that marginal states receive more funding; on the opposite, safe states tend to be rewarded. Also, states that are historically "swing" in presidential elections tend to receive more funds. Finally, we find strong evidence supporting partisan theories of budget allocation. States whose governor has the same political affiliation of the President receive more federal funds; while states whose representatives belong to a majority opposing the president party receive less funds.

Essays on the political economy of European integration

Recently, a rising interest in political and economic integration/disintegration issues has been developed in the political economy field. This growing strand of literature partly draws on traditional issues of fiscal federalism and optimum public good provision and focuses on a trade-off between the benefits of centralization, arising from economies of scale or externalities, and the costs of harmonizing policies as a consequence of the increased heterogeneity of individual preferences in an international union or in a country composed of at least two regions. This thesis stems from this strand of literature and aims to shed some light on two highly relevant aspects of the political economy of European integration. The first concerns the role of public opinion in the integration process; more precisely, how economic benefits and costs of integration shape citizens' support for European Union (EU) membership. The second is the allocation of policy competences among different levels of government: European, national and regional. Chapter 1 introduces the topics developed in this thesis by reviewing the main recent theoretical developments in the political economy analysis of integration processes. It is structured as follows. First, it briefly surveys a few relevant articles on economic theories of integration and disintegration processes (Alesina and Spolaore 1997, Bolton and Roland 1997, Alesina et al. 2000, Casella and Feinstein 2002) and discusses their relevance for the study of the impact of economic benefits and costs on public opinion attitude towards the EU. Subsequently, it explores the links existing between such political economy literature and theories of fiscal federalism, especially with regard to normative considerations concerning the optimal allocation of competences in a union. Chapter 2 firstly proposes a model of citizens’ support for membership of international unions, with explicit reference to the EU; subsequently it tests the model on a panel of EU countries. What are the factors that influence public opinion support for the European Union (EU)? In international relations theory, the idea that citizens' support for the EU depends on material benefits deriving from integration, i.e. whether European integration makes individuals economically better off (utilitarian support), has been common since the 1970s, but has never been the subject of a formal treatment (Hix 2005). A small number of studies in the 1990s have investigated econometrically the link between national economic performance and mass support for European integration (Eichenberg and Dalton 1993; Anderson and Kalthenthaler 1996), but only making informal assumptions. The main aim of Chapter 2 is thus to propose and test our model with a view to providing a more complete and theoretically grounded picture of public support for the EU. Following theories of utilitarian support, we assume that citizens are in favour of membership if they receive economic benefits from it. To develop this idea, we propose a simple political economic model drawing on the recent economic literature on integration and disintegration processes. The basic element is the existence of a trade-off between the benefits of centralisation and the costs of harmonising policies in presence of heterogeneous preferences among countries. The approach we follow is that of the recent literature on the political economy of international unions and the unification or break-up of nations (Bolton and Roland 1997, Alesina and Wacziarg 1999, Alesina et al. 2001, 2005a, to mention only the relevant). The general perspective is that unification provides returns to scale in the provision of public goods, but reduces each member state’s ability to determine its most favoured bundle of public goods. In the simple model presented in Chapter 2, support for membership of the union is increasing in the union’s average income and in the loss of efficiency stemming from being outside the union, and decreasing in a country’s average income, while increasing heterogeneity of preferences among countries points to a reduced scope of the union. Afterwards we empirically test the model with data on the EU; more precisely, we perform an econometric analysis employing a panel of member countries over time. The second part of Chapter 2 thus tries to answer the following question: does public opinion support for the EU really depend on economic factors? The findings are broadly consistent with our theoretical expectations: the conditions of the national economy, differences in income among member states and heterogeneity of preferences shape citizens’ attitude towards their country’s membership of the EU. Consequently, this analysis offers some interesting policy implications for the present debate about ratification of the European Constitution and, more generally, about how the EU could act in order to gain more support from the European public. Citizens in many member states are called to express their opinion in national referenda, which may well end up in rejection of the Constitution, as recently happened in France and the Netherlands, triggering a European-wide political crisis. These events show that nowadays understanding public attitude towards the EU is not only of academic interest, but has a strong relevance for policy-making too. Chapter 3 empirically investigates the link between European integration and regional autonomy in Italy. Over the last few decades, the double tendency towards supranationalism and regional autonomy, which has characterised some European States, has taken a very interesting form in this country, because Italy, besides being one of the founding members of the EU, also implemented a process of decentralisation during the 1970s, further strengthened by a constitutional reform in 2001. Moreover, the issue of the allocation of competences among the EU, the Member States and the regions is now especially topical. The process leading to the drafting of European Constitution (even if then it has not come into force) has attracted much attention from a constitutional political economy perspective both on a normative and positive point of view (Breuss and Eller 2004, Mueller 2005). The Italian parliament has recently passed a new thorough constitutional reform, still to be approved by citizens in a referendum, which includes, among other things, the so called “devolution”, i.e. granting the regions exclusive competence in public health care, education and local police. Following and extending the methodology proposed in a recent influential article by Alesina et al. (2005b), which only concentrated on the EU activity (treaties, legislation, and European Court of Justice’s rulings), we develop a set of quantitative indicators measuring the intensity of the legislative activity of the Italian State, the EU and the Italian regions from 1973 to 2005 in a large number of policy categories. By doing so, we seek to answer the following broad questions. Are European and regional legislations substitutes for state laws? To what extent are the competences attributed by the European treaties or the Italian Constitution actually exerted in the various policy areas? Is their exertion consistent with the normative recommendations from the economic literature about their optimum allocation among different levels of government? The main results show that, first, there seems to be a certain substitutability between EU and national legislations (even if not a very strong one), but not between regional and national ones. Second, the EU concentrates its legislative activity mainly in international trade and agriculture, whilst social policy is where the regions and the State (which is also the main actor in foreign policy) are more active. Third, at least two levels of government (in some cases all of them) are significantly involved in the legislative activity in many sectors, even where the rationale for that is, at best, very questionable, indicating that they actually share a larger number of policy tasks than that suggested by the economic theory. It appears therefore that an excessive number of competences are actually shared among different levels of government. From an economic perspective, it may well be recommended that some competences be shared, but only when the balance between scale or spillover effects and heterogeneity of preferences suggests so. When, on the contrary, too many levels of government are involved in a certain policy area, the distinction between their different responsibilities easily becomes unnecessarily blurred. This may not only leads to a slower and inefficient policy-making process, but also risks to make it too complicate to understand for citizens, who, on the contrary, should be able to know who is really responsible for a certain policy when they vote in national,local or European elections or in referenda on national or European constitutional issues.

The Dynamics of Decentralization in Italy: Towards a Federal Solution? European Diversity and Autonomy Papers, EDAP/04 2013

This paper analyses the recent process of state decentralisation in Italy from the perspectives of political science and constitutional law. It considers the conflicting pressures and partisan opportunism of the decentralising process, and how these have adversely affected the consistency and completeness of the new constitutional framework. The paper evaluates the major institutional reforms affecting state decentralisation, including the 2001 constitutional reform and the more recent legislation on fiscal federalism. It argues that while the legal framework for decentralisation remains unclear and contradictory in parts, the Constitutional Court has performed a key role in interpreting the provisions and giving life to the decentralised system, in which regional governments now perform a much more prominent role. This new system of more decentralised multi-level government must nevertheless contend with a political culture and party system that remains highly centralised, while the administrative apparatus has undergone no comparable shift to take account of state decentralisation, leading to the duplication of bureaucracy at all territorial levels and continuing conflicts over policy jurisdiction. Unlike in federal systems these conflicts cannot be resolved in Italy through mechanisms of “shared rule”, since formal inter-governmental coordination structure are weak and entirely consultative.

Deficit Reduction Act of 2005 : report of the Committee on the Budget, House of Representatives to accompany H.R. 4241, a bill to provide for reconciliation pursuant to section 201(a) of the concurrent resolution on the budget for fiscal year 2006 together with minority, additional and dissenting views.

"November 7, 2005."

Introduction of soft budget constraint as an analyzing tool into public management. The case of the Hungarian public administration reform

Public management reforms are usually underpinned by arguments that they will make the public administration system more effective and efficient. In practice, however, it is very hard to determine whether a given reform will improve the efficiency and effectiveness of the public administration system in the long run. Here, I shall examine how the concept of the soft budget constraint (SBC) introduced by János Kornai (Kornai 1979, 1986; Kornai, Maskin & Roland 2003) can be applied to this problem. In the following, I shall describe the Hungarian public administration reforms implemented by the Orbán government from 2010 onward and analyze its reforms, focusing on which measures harden and which ones soften the budget constraint of the actors of the Hungarian public administration system. In the literature of economics, there is some evidence-based knowledge on how to harden/soften the budget constraint, which improves/reduces the effectiveness and hence the efficiency of the given system. By using the concept of SBC, I also hope to shed some light on the rationale behind the Hungarian government’s introduction of such a contradictory reform package. Previously, the concept of SBC was utilized narrowly in public management studies, mostly in the field of fiscal federalism. My goal is to apply the concept to a broader area of public management studies. My conclusion is that the concept of SBC can significantly contribute to public management studies by deepening our knowledge on the reasons behind the success and failure of public administration reforms.

Fiscal decentralisation and economic theory

There is no complete overview or discussion of the literature of the economics of federalism and fiscal decentralization, even though scholarly interest in the topic has been increasing significantly over recent years. This paper provides a general, brief but comprehensive overview of the main insights from the literature on fiscal federalism and decentralization. In doing so, literature on fiscal federalism and decentralization is grouped into two main approaches: “first generation of theories” and “second generation of theories”.

Partial decentralization as a safeguard against favoritism

In this paper I investigate the optimal level of decentralization of tasks for the provision of a local public good. I enrich the well-known trade-off between internalization of spillovers (that favors centralization) and accountability (that favors decentralization) by considering that public goods are produced through multiple tasks. This adds an additional institutional setting, partial decentralization, to the classical choice between full decentralization and full centralization. The main results are that partial decentralization is optimal when both the variance of exogenous shocks to electorate’s utility is large and the electorate expects high performance from politicians. I also show that the optimal institutional setting depends on the degree of substitutability / complementarity between tasks. In particular, I show that a large degree of substitutability between tasks makes favoritism more likely, which increases the desirability of partial decentralization as a safeguard against favoritism.

A economia política das transferências fiscais no Brasil: o Fundo de Participação dos Estados (FPE) contribuiu no processo de redução das disparidades regionais entre 1985 e 2009?

O compromisso político com a redução da desigualdade regional é antigo e reaparece, na história do Brasil, em todos os momentos de rediscussão do pacto federativo. Um dos instrumentos centrais de sustentação do federalismo fiscal é a partilha de receitas arrecadadas, de maneira centralizada, pela União. No Brasil, o Fundo de Participação dos Estados (FPE), criado em 1967, responde pela função de partilha, entre os estados, das receitas arrecadadas com impostos federais. O presente trabalho propõe um modelo de análise do FPE, tendo como objetivo avaliar seus impactos sobre a dinâmica de redução da desigualdade interestadual observada no período recente. Em verdade, busca-se avaliar se as expectativas dos atores políticos que engendraram a criação do fundo se confirmaram, isto é, se a partilha de receitas entre os estados foi eficaz para promover a redução das disparidades regionais no processo de desenvolvimento econômico ocorrido no Brasil.

Construction of facilities under asymmetric information: do constitutional constraints matter?

This paper studies construction of facilities in a federal state under asymmetric information. A country consists of two regions, each ruled by a local authority. The federal government plans to construct a facility in one of the regions. The facility generates a local value in the host region and has spillover effects in the other region. The federal government does not observe the local value because it is the local authority's private information. 80 the federal governrnent designs an incentive-compatible mechanism, specifying if the facility should be constructed and a balanced scheme of interregional transfers to finance its cost. The federal governrnent is constitutionally constrained to respect a given leveI of each region's welfare. We show that depending upon the facility's local value and the spillover effect, the governrnent faces different incentive problems. Moreover, their existence depends crucially on how stringent constitutional constraints are. Therefore, the optimal mechanism will also depend upon these three features of the model.

Tax reform under fiscal stress: a CGE analysis of the Brazilian tax reform

In spite of a general agreement over the distortion imposed by the current Brazilian tax system, attempts to reform it during the last decade have faced several restrictions to its implementation. Two of these restrictions were particular binding: a) fiscal adjustment restriction (public sector debt cannot increase), b) fiscal federalist restriction (revenues from individual states and municipalities cannot decrease). This paper focuses on a specific reform that overcomes in principle the fiscal federalist restriction. Using Auerbach and Kotlikoff (1987) model calibrated for the Brazilian economy, I analyze the short and long run macroeconomic effects of this reform subject to the fiscal adjustment restriction. Finally, I look at the redistributive effects of this reform among generations as a way to infer about public opinion’s reaction to the reform. The reform consists basically of replacing indirect taxes on corporate revenues, which I show to be equivalent to a symmetric tax on labor and capital income, by a new federal VAT. The reform presented positive macroeconomic effects both in the short and long run. Despite a substantial increase in the average VAT rate in the first years after the reform, a majority of cohorts experienced an increase in their lifetime welfare, being potentially in favour of the reform.

Fiscal interactions and spillover effects of a federal grant to brazilian municipalities

Qual o impacto de uma transferência incondicional a um município quando seu vizinho também recebe a transferência? Nesse artigo n os testamos se uma transferência do governo federal, o Fundo de Participação dos Municípios (FPM), afeta os gastos municipais de forma diferente dependendo dos municípios vizinhos. Nos utilizamos municípios próximos a um dos quatro pontos de descontinuidade no repasse do FPM de acordo com faixas de população e que possuíam vizinhos próximos a pontos de descontinuidade diferentes. Nós estimamos o impacto do FPM recebido pelo próprio municípios e pelo vizinho usando o método de Regressões em Descontinuidade (RDD). Os resultados indicam que parte do efeito flypaper do FPM sobre a economia local estimado na literatura pode ser explicado pelo aumento de gastos nos municípios vizinhos. O spillover e em geral positivo, com exceção dos gastos em saúde e saneamento em algumas faixas populacionais. Nós também consideramos uma amostra de vizinhos mais distantes dos pontos de descontinuidade, e mostramos que nesse caso as diferenças nas estimativas quando controlamos pelo FPM do vizinho não são substanciais.

Efeitos das transferências intergovernamentais sobre as finanças públicas dos municípios do Rio Grande do Norte (2001-2010)

The Brazilian tax structure has specific characteristics and the performance level of government. The autonomy given to municipalities to manage their activities after the 1988 Constitution, made them highly dependent on intergovernmental transfers of resources, revealing the fragility of the administrative capacity of these entities. The vertical gap revealed by the constitutional structure of the Brazilian fiscal federalism model contributes to the formation of this specific feature that you are eroding the tax base and the ability of municipal own revenues. Although there was a better regulation of these transfers after the enactment of the Fiscal Responsibility Law, it is observed that the amount of resources transferred to the municipalities of Rio Grande do Norte is very high and is the main source of revenue of municipalities. In light of the theory of federalism and fiscal decentralization, in particular, the theories related to intergovernmental transfers, we seek to diagnose the transfers from the systematization of information on the origin, destination and value. We used the econometric model of System Dynamic Panel GMM in making the diagnosis and verification of the impact of transfers on public finances of the municipalities of the newborn, associated with a review in light of the theory of fiscal federalism and intergovernmental transfers. The paper presents some proposals for the transfer system and the composition of spending in order to contribute to greater tax efficiency

Revenue sharing: The case of Brazil's ICMS

Includes bibliography

Desigualdades econômicas inter-regionais, capacidade tributária e esforço fiscal dos Estados da Amazônia (1970-2000): uma abordagem econométrica de fronteira estocástica

O objetivo do presente trabalho é, portanto, apresentar uma análise dos efeitos das desigualdades econômicas inter-regionais sobre as desigualdades inter-regionais da arrecadação tributária estadual na esfera do federalismo fiscal. O problema da desigualdade interregional entre as regiões e os estados brasileiros sempre foi o principal foco de atenção dos economistas regionais. Entretanto, são relativamente escassos os estudos e as pesquisas que visam estudar os efeitos das desigualdades econômicas inter-regionais sobre as desigualdades tributárias inter-regionais da arrecadação efetiva e potencial entre os estados federativos brasileiros. Por resolveu-se analisar os resultados da medição da capacidade da arrecadação tributária dos estados brasileiros, com destaque para os estados da região Norte, para os anos de 1970 até 2006. A metodologia utilizada para estimar a capacidade de arrecadação tributária e determinar o esforço fiscal dos governos estaduais foi o modelo econométrico de fronteira estocástica, adaptado para esse fim.

Minimizing the Price of Tranquility: How to Discourage Scotland's Secession from the United Kingdom

What some view as overly-generous funding of the Scottish parliament results from Scotland.s credible threat to secede from the United Kingdom. Scotland is shown to benefit from a second mover advantage in a non-cooperative sequential game over the allocation of public funds. Various reform proposals are criticized for not recognizing that reform of Scottish government finances must be consistent with Scotland.s credible threat. Fiscal autonomy -- in which the Scottish parliament finances a much greater proportion of its spending from Scottish-sourced taxes, is demonstrated to be a viable reform within the existing political context and, in some circumstances, could remove Scotland.s second mover advantage. We also use a cooperative bargaining game model to demonstrate that an Australian style grants commission would not be a viable reform in the British context.