Fiscal Federalism and Intergovernmental Financial Relations

This chapter discusses how fiscal federalism arrangements relate to and interact with the management of public sector finances — both at the wider general government level and in local governments. In many countries, subnational (or local) governments are assigned responsibility for delivering important public service functions and thus engage in a significant share of public sector spending. In countries that rely on devolved, elected local governments to deliver public services, local governments are typically considered autonomous government entities — entities that are legally and politically separate from the central government and with their own separate budgets. Indeed, a defining characteristic of devolved regional and local governments is that these entities prepare and execute their own budgets, collect some of their revenues from their own sources, and have the ability to engage in borrowing in their own name (IMF 2001).