The future of fiscal federalism

For at least three decades after World War II, there was little interest in fiscal decentralization. Because of the large growth in public spending that took place during that period, a growth that was mainly focused at the central government level, this was a period characterized by fiscal centralization in most countries. Starting in the late 1970s, a reaction against large governments started. This reaction followed two distinct tracks: privatization and fiscal decentralization. The paper argues that these two tracks were almost two sides of the same coin and were largely mutually exclusive. They reflected similar concerns and objectives. In more recent decades, globalization has been creating global public goods or public “bads” and international activities that would require public attention or the action of a “world government”. Because no such government exists, its role is progressively being delegated to proxies, in the form of international organizations, agreements, treaties, accords and other forms of international understandings. The paper concludes that this development is likely to weaken over time the role of central governments. It also speculates that it may strengthen the importance of municipalities.