ABSTRACT
This chapter focuses on the financing of residual deficits and more particularly on the role of intergovernmental financing arrangements in normal circumstances. It briefly reviews how debt and fiscal balances are distributed across levels of government in fiscal federations. In general, the largest share of debt and deficits is held at the central level, although the share held by subnational governments ( SNGs) tends to increase with their capacity to finance expenditure with own revenue. The chapter investigates the different channels through which central and state government financing interact and reviews special arrangements that occurred during the formation of federal states. It describes prevalent financing practices, instruments, and financing costs of central and state governments. This chapter draws parallels to current and proposed financing arrangements in the European Union. Debt and deficit allocations across different levels of government tend to follow governments' tax capacity, with more autonomous subnational governments borrowing more.
