Fiscal Federalism and Diversity Accommodation in Multilevel States: A Comparative Outlook

The accommodation of diversity is one of the greatest challenges that modern societies must face. In addition, today, many federal systems encounter a loss of solidarity and an upsurge of interregional disparities. These have exacerbated dormant tensions and intergovernmental conflicts that, in certain cases, could even give rise to secessionist movements. Multilevel government (either in federal or regional form) plays a key role in managing diversity and reducing the risk of secession. This has led to decentralization being presented by some scholars as the antidote for secessionist/nationalist movements. However, contrasting views also spice up the debate. Moreover, history has not proven any one of these theories. Although conflicts and secessionism arise from multiple factors, traditionally, the literature on diversity accommodation has predominantly focused on differences from ethnonational, cultural, linguistic, or religious diversity and not on the economic driver for autonomy or national recognition. The study of fiscal instruments and financial relations (i.e., fiscal federalism) has, for the most part, been left aside, even though the latter has a critical role in this respect. Although the financial dimension is a vital component of any system of shared government, as the lack of resources to finance constitutionally assigned competences would render these inoperable, reducing autonomy to an empty vessel, the nexus between diversity accommodation and fiscal federalism remains to a large extent understudied. In addition, the financial dimension is almost never mentioned in the literature on diversity accommodation. Along the same line, fiscal federalism has been analyzed from other angles, paying attention to matters such as the allocation of financial resources and the powers thereof, as well as the functioning of financial relations among different levels of government, but without drawing much interest from the literature on nationalism and minority accommodation and to the contribution the first could give to the latter (and vice versa) in terms of research advancements.

“Diversity” and “asymmetry” are intimately intertwined with multilevel governance. Asymmetric arrangements often help accommodate various characteristics of diversity in a federation. In turn, asymmetric arrangements may have an impact on scope and level of diversity. This chapter provides an overview on the prevalence of asymmetric arrangements in multilevel governance, particularly fiscal decentralisation, to help address issues of diversity in a federation. The chapter also addresses measurement limits in this area, and presents the framework developed within the OECD to overcome these limits, thereby focusing on expenditure and revenue arrangements, intergovernmental transfers, as well as fiscal constitutions.

The Federal Commonwealth of Australia was established in 1901 by six self-governing British colonies of very different sizes. With lucrative customs and excise duties transferred to the Commonwealth, a politics of fiscal equalization quickly emerged among the six Australian States. The less populous States feared economic and fiscal domination. Managed politically for three decades, these fears became the focus of an independent, expert, economic body from the 1930s: the Commonwealth Grants Commission. Principles and methods developed by this body focused on comparative fiscal needs and capacities. In the 1980s, two more subnational jurisdictions joined Australia’s fiscal equalization system, two territories of the Commonwealth granted self-government. This increased the diversity of size among constituent units and led to methodological developments in assessing comparative fiscal capacities, or “relativities.” Two case studies from this recent era show contrasting developments in Australian fiscal equalization. The Northern Territory has maintained a high relativity for over three decades based on its dispersed Indigenous population, reflecting low-revenue capacity and high expenditure needs. Western Australia has developed high revenue capacity, based on royalties from iron ore mining. This has led Western Australia to argue against full fiscal equalization, winning significant concessions in this direction since 2018. Australian fiscal equalization is well institutionalized, but not beyond political challenge and change.

Territorial socioeconomic inequalities are the main diversities to be accommodated in the Brazilian federation. They have been a major influence in the design of a transfer system that reduces intergovernmental inequalities in per capita revenue, especially in the case of municipalities in which the Gini coefficient from own revenue has been reduced by half (from 0.5 to 0.24). Grants are mandatory and regulated by the Constitution and laws that establish stable formula-based distribution criteria. Therefore, they assure a significant and steady amount of resources to subnational governments and are protected from short-term political bargaining. However, some important transfers do not have redistributive objectives and increase inequalities. Also, the equalization funds’ distribution criteria present inefficiencies that favor small states and municipalities regardless of their socioeconomic development level. We argue that this historical and political process produced a system that accommodates diverse fiscal capacities by significantly reducing inequalities arising from own revenues. However, its efficiency can be questioned. Moreover, since democratization, the few and marginal advances in this redistributive federative agenda highlight how difficult it is to articulate territorial interests in broad coalitions able to approve redistributive fiscal reforms.

Federalism is often advanced as a means to enable the coexistence of diverse peoples beneath a common umbrella of a shared state apparatus. Scholars have long considered how the division of powers and the allocation of jurisdictional capacities among multiple orders of government may empower and foster the autonomy of internal national minority communities. Until recently, however, the ways in which the fiscal arrangements of a federation may affect the coexistence of diverse peoples have remained largely unexplored. Using the case of Canada, this chapter identifies the concrete features of fiscal federalism that may contribute to—or detract from—the empowerment of internal minority national communities. Drawing from the Canadian experience, three features of a fiscal architecture are directly related to the realization of minority national empowerment: (1) representation and participation in the management of fiscal arrangements; (2) the independence of the revenue base that is available to internal communities; and (3) the conditions and time horizons that are associated with the arrangements.

Fiscal constitutions play a key role in shaping perceptions that impact secession demands through fiscal autonomy and equalization. This study finds that the absence of fiscal equalization fosters anxiety in low-income states, while excessive equalization demoralizes high-income states. However, secessionist movements are only incited in the presence of an ethnic-economic overlap and the perception of economic deprivation and political disempowerment among minorities. Economic injustice often serves as the initial catalyst, politicizing insecure minorities and propelling them to seek institutional means to express their grievances. Yet, when state systems fail to provide these channels, ethnic or religious minorities may resort to violence. The central government can only negotiate through concessions until military confrontation escalates. Once military suppression begins, it tends to reinforce the very forces it seeks to suppress, and the secessionist crisis enters a vicious cycle of reinforcement. However, when militants surrender—as in Assam’s case—it halts counterinsurgency operations and triggers concessions. Contrastingly, in Punjab, militants unwaveringly demanded independence and refused concessions. Thus, when the military eventually quelled the movement, the central government had no incentive to offer concessions. Finally, if military confrontations are prolonged due to continuous internal and external support for the militants, any previously granted concessions are retracted to undermine the militancy’s support base, as in the cases of Jammu and Kashmir. The region’s special privileges, afforded by Article 370, have been annulled, and its status has been downgraded from a state to a union territory, placing it under direct central administration.

This chapter aims to analyze, from a diachronic perspective, the relationship between Italian regionalism and Italian fiscal federalism. Within a journey that will touch upon the main stages that have outlined the “incomplete Italian fiscal federalism”, an attempt will be made to highlight how—in the peculiarity of the Italian vertical division of powers—efforts have been made to reconcile key elements of any decentralized system, namely differentiation, autonomy, equality, and solidarity. The analysis will also highlight the most recent challenge posed to this reconciliation, namely the process of implementation of the so-called differentiated regionalism as provided for in Article 116.3 of the Italian Constitution.

The creation of the nine South African provincial governments was a concession by the African National Congress (ANC) to the National Party (NP) regime during the negotiated transition to democracy. The ANC favored a strong national government and strong local government, while the NP saw provinces as a vehicle for protection of White minority rights and privileges. While playing an important peace building function, provinces were endowed by the 1996 Constitution with few exclusive functions and negligible own revenue raising powers, therefore largely reliant on intergovernmental grants from national government. These already limited provincial powers have been further attenuated over the last two decades by the relocation of functions (e.g., social security and training and vocational colleges to national government, housing and public transport to large metropolitan governments, the proposed National Health Insurance system which will centralize current provincial health functions). This is exacerbated by centralized wage bargaining resulting in provincial wage bill escalation outstripping increases in intergovernmental grants and crowded out other non-wage expenditures. Provincial governments have little control over their largest cost driver which introduces budgetary rigidities. The highly centralized application of intergovernmental relations has limited scope for provincial experimentation and innovation.

This chapter focuses on the diversities within the Spanish State of Autonomies, shedding light on the asymmetrical nature of the devolution process, with an emphasis on the transformation of the constitutional framework concerning tax and finance power decentralization, juxtaposing Spanish Fiscal Federalism within the broader context of the European Union. An exploration of intergovernmental tax relations uncovers the limited efficacy of mixed commissions, leading to an assessment of the Spanish Constitutional Court's central role in mediating conflict. The analysis concludes by looking forward, speculating on the potential future trajectories of Spanish fiscal federalism.

The accommodation of territorial diversity is one of the biggest challenges that modern societies must face nowadays, especially in a context where secessionist movements are on the rise. Multilevel government plays a key role in managing diversity and reducing the risk of secession. The fiscal dimension is a vital component of any system of shared government as the lack of financial resources to finance constitutionally assigned competences would render them inoperable, reducing autonomy to an empty vessel. However, the use of fiscal instruments to accommodate diversity and reduce the risk of secession has barely been explored. Against this background, this chapter explores, from a legal perspective, the internal architecture of the United Kingdom’s territorial funding arrangement, the Barnett formula, with the aim of investigating its integrative and disintegrative effects in relation to Scotland. This is done on the hypothesis that redistribution mechanisms: raise the cost of secession in subunits that are net receivers of funds; have an integrating function as they promote economic development and cohesion; and tend to enhance a sense of belonging and solidarity among constituent units by fostering national unity. The chapter focuses on all sources of law, including also secondary legislation, with the final aim of evaluating if and to what extent the Barnett formula can be conceived as an instrument of nation building that contributes to reducing territorial tensions and accommodating diversity, in the end reversing disintegrative trends. This is done through the evaluation of the integrative and disintegrative potentials of each of the elements of the internal architecture of equalization mechanisms.

The chapter attempts to highlight the challenges that arise in the chapters of this book when examining the interaction between diversity accommodation and fiscal federalism within the selected federal systems. It explores how the need to address diversities influences financial relations and their evolution, focusing on which types of diversity drive these dynamics, potentially leading to integrative or disintegrative effects for the federal system. To accomplish this, the chapter delves into three major critical areas: the cause-effect relationship between diversity and fiscal arrangements, the balance between financial autonomy and solidarity, and the participation of subnational governments in decision-making processes. Examples from the case studies analyzed in this book are used to illustrate the complexities of accommodating diversities through fiscal federalism.