Fiscal Federalism and Solidarity

The fiscal dimension is a vital component of any system of shared government, as the lack of resources to finance constitutionally assigned competencies would render them inoperable, reducing autonomy to an empty vessel. However, the nexus between them is still to a large extent understudied (Weingast 2014). This is in part due to fiscal federalism being a rather neglected topic of federalism, especially among public lawyers, due to the complexity and polyhedral form of this phenomenon.This paper aims at integrating the discussion on the role of fiscal constitutions -understood in a broad sense- as a determinant, among other factors, not only of financial relations but also of the inherent dynamics of a federal system². More specifically, focusing on the role of equalization mechanisms as tools of (dis)integration in multilevel countries that have experienced secessionist challenges. Equalization mechanisms are envisaged to reduce disparities among the territorial subunits of a state to achieve a certain degree of horizontal equity. These disparities are often a side effect of decentralization.

Disparities among the territorial subunits of a state are often a side effect of decentralization. 

Sometimes, this has a cost in terms of economic efficiency as divergences among subunits lead to different financial capacities -e.g. some regions are richer than others, have natural resources, etc.- and different costs when providing public services -due to geography, demographics, or any other circumstances.

Equalisation can, thus, be described as a transfer of fiscal resources across jurisdictions with the aim of offsetting differences in revenue-raising capacity or public service cost (Blöchliger et al. 2007, 5). Therefore, the main objective of equalization is to allow subunits to provide a comparable level of services at similar levels of taxation. Consequently, as Boadway (2004, 212) puts it, equalization can be seen as a necessary counterpart to decentralization and unsurprisingly, equalization mechanisms can be found in most federal systems with the exceptions of the USA and Mexico (Watts 2008, 108-109). Further, it is also important to highlight that behind equalization lies an idea of solidarity, of the need to achieve a certain degree of horizontal redistribution among territorial subunits in a multilevel state. This is, of course, connected with the value that each society gives to horizontal equity, not only in terms of equality among all citizens but also among the subunits that integrate the country.

The overall aim of the study is to conduct a comprehensive analysis that will explore from a legal point of view the role of equalization mechanisms as a tool of territorial integration in multilevel states facing secessionist challenges.

This research builds upon the hypothesis that equalization mechanisms:

• raise the cost of secession in sub-units that are net receivers of funds
• have an integrating function as they promote economic development and cohesion
• tend to enhance a sense of belonging and solidarity among constituent units by fostering national unity

Along these lines, the structural elements of these mechanisms will be explored to develop a set of indicators to calibrate their influence in the increase or decrease of support for secession so as to be able to measure the (dis)integrative effects of equalization mechanisms in territorial sub-units that currently face or have faced a secessionist challenge. The comparative perspective shows that although equalization has its own characteristics in each model, there is some homogeneity around its internal architecture. Therefore, the benchmark will feature the main recurrent elements in comparative perspective that are always present in equalization systems all over the world, irrespective of the territorial nature of the state in question, as they form the backbone of any equalization compact since the absence of one of them would result in the denaturalization of the system, preventing it from performing the function for which it was conceived. The study will adopt a legal perspective, focusing on arrangements at constitutional and legal level, including also secondary legislation.

Towards a Working Definition of a Successful Equalization Mechanism

In order to design the benchmark, a closer look at the internal architecture of equalization mechanisms must be taken, paying attention to the characteristics that define solidarity mechanisms and the rationales that are behind them regarding territorial (dis)integration. For this reason, the cases of Australia, Germany and Switzerland will be used as reference models with the aim of illustrating that accommodating diversity, regardless of its origin (due to economic, religious, linguistic or even multinational cleavages), has an impact in the design and implementation of solidarity mechanisms, notably fiscal equalization programs. These three countries, although different in nature, can be regarded as successful examples of equalization programs with respect to their territorial subunits. But how can success be defined?

Behind equalization lies an idea of solidarity, of horizontal redistribution, of equality among the subunits and equality among all citizens

Defining what makes an equalization mechanism successful -or, conversely, unsuccessful- is a complex and not risk-free question. Given the technical complexity of these programs, and despite a certain homogeneity in the elements that comprise them, there is a significant variation among the different models that we can find in comparative federalism, as each one has its own peculiarities that make them, in a certain sense, unique.

But in any case, there are some factors to consider. First, equalization needs time. Reducing horizontal disparities is a long-term goal as these programs need time to develop their function and progressively reduce the imbalance between sub-units. Consequently, mature federations tend to be better prepared to solve these issues than young federations as they have more experience in dealing with the side effects of decentralization. Second, the need for solidarity among territories is a value that needs to be constructed over time and sometimes is difficult to inoculate (Watts 2015, 21). In this sense, the acceptance of the need to equalize as a core component of multilevel government is linked to the degree of federal culture present in a state. In other words, to the degree of mutual trust between the various entities in the political federal space (Fafard, Rocher and Coté 2010, 22). The greater the federal culture, the greater the confidence in the political system and in the institutions that conform it.

Taking all the above considerations into account, success is defined by the existence of well-established equalization mechanisms that even though they may be subject to political criticism (sometimes even harsh), the need for their existence is widely accepted and its continuity is not in question although there may be calls for their reform.

Integration and Disintegration: The Importance of the Territorial Dimension  

The concepts of integration (Wallace 1990; Haas 1968) and disintegration (Scheller and Eppler 2014) used in this analysis are borrowed from the literature of European integration and applied to the internal dynamics that occur within multilevel systems between the central level and the territorial subunits, as well as among the latter themselves.

One of the most influential definitions of integration was coined by Wallace (1990, 9), who characterizes this phenomenon as “the creation and maintenance of intense and diversified patterns of interaction among previously autonomous units”. Following this, an aspect of equalization -e.g., the territorial participation in the governance of the compact- that contributes to strengthen the ties between the national state and the territorial subunit by promoting dialogue and cooperation while respecting and protecting the political autonomy of the latter will be described as an integrative force. In the same vein, those elements of equalization that contribute to reinforce the loyalties of the territorial subunits towards the center are considered a step towards further integration.

An archetypal model of equalization for diversity accomodation does not exist. There are as many models of redistribution as there are types of federalism.

In contrast to integration, disintegration has not attracted as much interest and the elaboration of a definition has not been pursued in depth. Only Scheller and Eppler (2014, 26) have attempted to fill the vacuum, conceptualizing this phenomenon by defining disintegration as those “erosion processes promoted by individual or collective actors […] which lower the legal, economic, territorial, socio-cultural and/or legitimating integration level” undermining “the unity of the internal market, the Monetary Union and the European legal area”. On this basis, an aspect of equalization that weakens the ties between a territorial subunit and the national level, hindering dialogue and cooperation will be considered as disintegrative. In the same vein, lack of participation by the territorial subunits that may result in isolation or opportunistic behavior that undermines the principle of horizontal solidarity will also be understood as promoting disintegration.

In sum, the aim is to identify those aspects that may increase the allegiance to the parent state by promoting dialogue and cooperation among the different components of a multilevel state, reducing tensions and appeasing conflicts as well as those that may hinder these values fostering disintegration and increasing the rejection of the current political settlement which could fuel secessionist movements.

The Territorial Impact of the Internal Components of Equalization Mechanism

Although equalization mechanisms are a common feature in federal systems, it cannot be said that there is an archetypal model of equalization. Therefore, there are as many models of redistribution as there are types of federalism, since, like federal systems, each one tends to match the characteristics and needs of each state, with historical development playing an important role in the evolution of the different systems (Palermo and Kössler 2017, 13-20). Even if all equalization models are distinctive, it is possible to find a certain degree of homogeneity among its core components as Boadway and Shah (2009, 372-376) illustrate.

As the analysis will be framed following a legal perspective, it will explore seven indicators (see Table 1) whose nature is connected to the notion of fiscal constitution in the broader sense, hence not only paying attention to those elements “formally incorporated in some legally binding and explicitly constitutional document”, but also “customary, traditional, and widely accepted precepts” (Buchanan and Wagner 1977, 24) including sources of law without formal constitutional status and political facts that impact the interpretation and implementation of the rules and determine the way in which a system functions and evolves as in this aspect theory cannot be separated from practice.

TABLE 1: Seven Indicators of an Equalisation Program

1. Legal entrenchment of the program
2. Nature of the redistribution
3. Level and component of equalization
4. Conditionality
5. Institutional administering of the program
6. Length of the program
7. Dispute resolution

Concluding Remarks

The final aim is to develop a set of indicators that can be used as an instrument of legal comparison to calibrate the impact of equalization mechanisms on territorial integration. This analysis will be conducted through the evaluation of the integrative and disintegrative effects that the aforementioned seven elements have in the territorial accommodation of national minorities in multilevel systems with the aim of determining if and to what extent equalization mechanisms can be conceived as an instrument to reduce territorial tensions and accommodate diversity. This benchmark would allow drawing comparative conclusions to evaluate the appropriateness of equalization mechanisms in terms of territorial integration in sub-units at risk of secession. In other words, if they can be conceived as an instrument to reduce territorial tensions and accommodate diversity, and if so, to what extent?

Footnotes
1. This article is financed in the framework of the funding scheme “Seal of Excellence” of the Autonomous Province of Bolzano/Bozen – South Tyrol, project DATE.

2. The notion of “federal system” is used to include “all those systems in which at least two political tiers of government exist, thereby combining self-rule and shared rule and thus making use (to a greater or lesser extent) of the federal toolkit” (Palermo and Kössler 2017).

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