Fiscal federalism and diversity accommodation in multilevel states: a comparative perspective

Multilevel government (either in federal or regional form) plays a key role in managing diversity and reducing the risk of secession. This has led to decentralization being presented by some scholars as the antidote for secessionist/nationalist movements (Kymlicka 1998), however contrasting views also spice up the debate (Sorens 2015). Moreover, history has not proven anyone of these theories.

Although conflicts and secessionism arise from multiple factors, traditionally, the literature on territorial accommodation has predominantly focused on aspects of the federal model such as the recognition of national identities. The study of fiscal instruments and financial relations (i.e., fiscal federalism) has for the most part, been left aside, even though the latter has a critical role in this respect (Sorens 2015). In other words, the financial dimension is a vital component of any system of shared government, as the lack of resources to finance constitutionally assigned competences would render these inoperable, reducing autonomy to an empty vessel.

However, the nexus between diversity accommodation and fiscal federalism has to a large extent remained understudied (Weingast 2014); the financial dimension is almost never mentioned in the literature on diversity accommodation which is much more focused on aspects like the recognition of national identities (Gagnon and Iacovino 2007). Along the same line, fiscal federalism has been analyzed in terms of paying attention to matters such as the allocation of financial resources and the powers thereof (Anderson 2010) as well as the functioning of financial relations among different levels of government (Boadway and Shah 2009; Schnabel 2020), but without drawing much interest from the literature on nationalism and minority accommodation and to the contribution the first could give to the latter in terms of research advancements.

Against this background, and thanks to the funding of the Autonomous Province of Bolzano/Bozen - South Tyrol under the Seal of Excellence Call, I have been able to develop the project DATE – Diversity Accommodation through Territorial Equalization. DATE explores, from a legal point of view, the importance of fiscal arrangements as a tool of territorial integration 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. To this end, DATE has implemented a set of 7 indicators (see table below) to be applied to three case studies in Canada, Spain and the UK and compares each of the equalization programs currently in place in these countries with the benchmark outlined below in order to calibrate the (dis)integrative effects of its core components.

As the final activity of the project, together with Alice Valdesalici in June 2022 the Eurac Research Institute of Comparative Federalism organized a conference entitled “Fiscal federalism and diversity accommodation in multilevel states: a comparative perspective”, with the aim of shedding light on the role of fiscal constitutions as a determinant, among other factors, not only of financial relations but also of the inherent dynamics of a federal system (Palermo and Kössler 2017). In this regard, fiscal constitutions can be understood in a broad sense and viewed not only as rules “formally incorporated in some legally binding and explicitly constitutional document”, but also as unwritten rules like “customary, traditional, and widely accepted precepts” (Buchanan and Wagner 1977).

The starting point is that the degree of fiscal decentralization and the existence and eventually the increase of interregional disparities might play a key-role in exacerbating conflicts. To be investigated however is if and to what extent these elements are also determinants in sparking secessionist/nationalist claims, and this is done by putting financial relations into the broader context of the federal structure of a certain system. To do this, the Conference explored the rationale and the management of intergovernmental conflicts on finances within a selection of countries, integrating the internal dynamics that result from them in the analysis. This was done on the assumption that a process designed to accommodate a subnational entity could have negative repercussions on other subunits, creating a sentiment of alienation and hindering future processes of ratification or implementation in legal or constitutional form.

The Conference -which can be watched on the Institute’s YouTube channel- endeavored to shed light onto the role that fiscal federalism plays in diversity accommodation in multilevel states, whether regional or federal. With this purpose in mind, it explored and assessed the role of fiscal arrangements as a tool of territorial integration (versus disintegration), with special emphasis on determining if and to what extent different types of arrangements could be conceived as an instrument to reduce (or enhance) territorial tensions and accommodate diversity. The three panels were moderated by Alice Valdesalici and myself and resulted in fruitful discussions with the speakers and the audience based on the subject and resulting comments.

The first panel featured Hansjörg Blöchliger (OECD) and Damien Piron (University of Louvain, Belgium). Blöchliger focused on the different intergovernmental fiscal frameworks that can be found around the world and with particular attention being given to the different types of fiscal constitutions already in place to accommodate diversity. To do that, he presented a set of indicators -such as tax autonomy, degree of decentralization or regional differences in GDP- that showed how different countries -federal or not- have chosen different frameworks and institutions to accommodate their policy and political needs with a special focus on equalization programs. The second speaker, Damien Piron, focused on the case of Belgium providing a historical overview of the federated entities financial system with the aim of highlighting the normative underpinnings of an overly complex system. He identified three broad periods in the history of fiscal federalism in Belgium, describing how these attempted at the time to respond to the different linguistic, cultural and economic preferences of the different communities that integrate Belgium.

The second session dealt with four different case studies, shedding light on the impact of intergovernmental financial relations in four different continents. Professor David Bell (University of Stirling, United Kingdom) centered his presentation on the effects of Brexit on fiscal federalism in the United Kingdom. He provided valuable insight into how the political economy of Brexit has substantially undermined the cohesion of the UK’s internal economic frameworks, detailing the way in which the return of powers from Europe has shaped the redistribution of economic powers within the UK. He also stressed how leveling up has become an important feature of the political discourse in the UK in respect of England’s regional inequalities. The second speaker of the morning was William Sanders (Australian National University, Australia). Professor Sanders focused on the evolution of fiscal federalism in Australia beginning with its constitutional origins and early practice to the role of the Commonwealth Grants Commission and the trajectories this body contributed to within the Australian system. He also delved into two case studies of Western Australia and the Northern Territory to illustrate existing diversities and how they have impacted the evolution of the Australian federation. Then, Chanchal Kumar Sharma (Central University of Haryana, India) explored the role of fiscal federalism in India in relation to secessionism and diversity accommodation. He reflected on the cases of Assam, Jammu and Kashmir and Punjab offering insights into the role played by fiscal intergovernmental relations in respect to the secessionist demands of these territories. Finally, the last speaker of the day was Solomon Negusse (Addis Ababa University, Ethiopia). He began by presenting an overview of fiscal relations in Ethiopia followed by a detailed explanation of the pillars of fiscal federalism in that country. He went on to discuss whether fiscal federalism enhances accommodation diversity underlining the existing trends and challenges of the Ethiopian federation. To conclude, he presented some considerations to improve the integration of fiscal intergovernmental relations within the country.

The third and final session covered the case studies of Spain with Violeta Ruiz Almendral (University Carlos III of Madrid and BBVA Leonardo Fellow, Spain) and of Canada with Jennifer Wallner (University of Ottawa, Canada). Professor Ruiz Almendral explained how fiscal federalism in Spain functions with a special focus on conflict resolution. She described the main sources of intergovernmental conflicts in the Spanish system, highlighting the role of the courts in solving these disputes with a special emphasis on that of the Constitutional Court. She also gave an overview of other conflict resolution mechanisms, stressing the potential role of the Arbitration Courts not only in the common system Communities but also in the Basque Country and Navarra - both territories that have special financing regimes. The last intervention was made by Jennifer Wallner who provided insight into four different models of fiscal federalism in Canada. Professor Wallner started with a reference to the significance of fiscal federalism in pluri-national societies with the aim of describing how some minority nations have been able to secure stronger empowerment within a fiscal federalism framework while others have been disempowered. Specifically, she went beyond the traditional model which is focused on federal–provincial/territorial relations and expanded her focus to the fiscal intergovernmental relations that unfold between the federal government and the First Nations under the Indian Act, as well as between the former and the self-governing First Nations.

Before concluding these lines, I would like to thank all the panelists and attendees for participating in the Conference and sharing their knowledge and experiences with us, as well as my colleague at the Institute of Comparative Federalism - Petra Malfertheiner - because without her dedication and effort this Conference would have never been possible.

The project DATE has been funded in the frame of the Seal of Excellence Program of the Autonomous Province of Bolzano/Bozen - South Tyrol, Department for Innovation, Research and University.