ABSTRACT
This chapter discusses the distribution of the budgetary functions such as revenue, expenditure and inter-government transfers, across levels of government in a sample of fiscal federations. It takes a descriptive perspective, although drawing as appropriate from the vast body of theoretical and empirical studies on fiscal federalism. The theory and practice of fiscal federalism has evolved substantially in recent years. The current literature typically distinguishes between two approaches to fiscal federalism. First generation fiscal federalism theory, rooted in the normative approach developed during the 1950s-60s, studies the performance of decentralized systems under the assumption of benevolent social planners. The second generation fiscal federalism theory builds on those models, but also incorporates the fiscal and political incentives facing subnational officials. The chapter covers the design of inter-governmental transfers, and discusses the European Union's budget. The distribution of functions is somewhat different in the European Union. Regional equalization and cross-country transportation networks consume an important share of the joint budget.
