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The term vertical fiscal imbalance (VFI) relates to a mismatch for an individual level of government
(federal, state or local) between its revenue-raising powers and expenditure responsibilities (p. 130).
Similarly, Robert Ebel mentions:
A vertical imbalance occurs when the expenditure responsibilities of sub-national governments do not
match with their revenue raising power (p. 166).
Intergovernmental transfers, as indicated in the authors’ texts, assume a variety of forms from one federation to another.
However, beyond the description of intergovernmental financial relations as such, the authors consider the issue of the
financial autonomy federated states retain, in each case, as far as how the transferred funds are used.
The financial autonomy of federated states remains complete when the transfer is unconditional. Among sources of
revenue that are not own-source, unconditional transfers provide the best guarantee that the autonomy of federated
entities will be respected and they minimize the distortions in decision-making regarding the delivery of public services
and goods. They have no impact on how the government distributes its spending among various types of public
services. Equalization, for instance, normally consists of unconditional transfers.
Conditional transfers, on the other hand, which are sometimes called for, from an economic standpoint, to correct
inefficiencies tied to the presence of externalities, may pose a number of problems. They influence the choices of
governments that receive them, sometimes creating distortions, and they especially favour governments that already
have a high fiscal capacity. Shared-cost programs, for instance, by reducing the cost of certain public services for
recipient governments, encourage them to spend more than they otherwise would. Accordingly, it is not surprising that 5 Commission on Fiscal Imbalance the growth in spending on Medicaid – a major shared-cost health program for the needy – in the United States accounts
for a significant proportion of the increase in the states’ share of total government spending in the United States. Sonja
Wälti provides examples of how conditional transfers create distortions in the choices made by cantons, pointing out
[…] research is unanimous in showing that the financially strongest cantons also benefit from the
biggest conditional transfers simply because they have the means to raise sufficient revenues in order
to obtain a big share (p. 106). [OUR TRANSLATION] 3. THE SITUATION OF THE COUNTRIES STUDIED The authors describe the intergovernmental financial relations within their country and the constitutional and political
context in which these relations unfold. Over the years, each of the countries studied has adopted a particular solution to
the problem of funding federated states or regional and local administrations, as the case may be. As we shall see,
these solutions are not frozen in time. Based on the contributions of the authors and on the Commission’s document13
when necessary, we begin with an overview of each country. We then broadly describe the expenditure and revenue
jurisdictions of the federat...
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