Fiscal functions in federal system Rappler

Fiscal functions in federal system Featured

THE GOVERNMENT, in general, maintains three main functions: stabilization, distribution, and allocation. Musgrave’s theory of public finance delineates the functions that will be assigned to federal government, to state government and local governments. The distribution and allocation functions of the states and local government are guided by the principle of efficiency and resource effectiveness; stabilization as an incumbent function of the federal government is rationalized by virtue of economies of scale.

The stabilization function is assigned to the federal government in maintaining stable aggregate demand, fiscal policies and sustaining stable prices. It is highly effective when carried by the federal government because competition of tiers of government is not possible in the stabilization function; instead it discourages differentiation of income levels across territories.

The distribution function is aimed at achieving the ethical notions of appropriate treatment of equals as equal. This function largely refers to tax assignments and transfer programs to achieve level of economic efficiency where desirable household incomes are maintained. Again, the aim is to ensure equal treatment of the equals. To this, the federal government takes care of this function.

The allocation function is handled by the state and local government. The government in the local tiers fills the gap within juridical territories where the market would fail. The production of public goods such as infrastructures, social services, health and education are provided because the state and local governments know better the demands of their citizens more than the ability of the federal government. The primacy of the state government in the allocation function is borne by the proximity principle. Rationally, the proximity of the government is the best barometer in deciding what public goods is demanded.

The state also maintains advantage in allocation function given the nature of the demand of geographically grouped citizens within a territory as it is highly defined and specific. Thus, when the state provides public goods, this is much closer to of any citizen’s demand. On the other hand, the production function in providing the public goods maintains constant returns to scale where inputs are private resource with rival characteristics. Here, the market will become inefficient: supply of the goods will be scarce while demand is very high due to the close uniformity of the revealed preferences of the public. This superimposes the market functions. The state government is obliged to intervene to ensure that citizens enjoy as equal are treated as equal. To this, every individual will have equity of access to government services. Note here, the term used is equity. This suggests that those who are weak, marginalized and helpless get the biggest attention of the government in terms of social services, education, health, early childhood education. However, this is costly if bannered by one state alone; this is costly on the budget. Though, this is also espoused in the inclusive growth principle in a unitary government; yet it remains a theory because the ability of the unitary government is highly limited and deeply narrowed by rent-seeking behaviors in the bureaucracy. In unitary government, the name of the game is log-rolling and pork barrel. Very costly and quickly depreciates ethics of service. In federal system, there will be no more pork barrel; there will be no more log-rolling. The budget is as good as what is spent by the government. In federal government, padding, cuts and shares, all the SOPs will be reduced if not totally eliminated. I was asked, is this possible? This is already a culture in the government? It can be changed. The substance takes the form of the container. Unitary is highly susceptible to corruption, and thus government spending is deeply laden with corruption. The exact opposite is federalism. This encourages ethics of governance and direct accountability of the government to the governed. The distance of the government is the first proof to this; the government is very near to the people it governs.000
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