Concepts

Overview This chapter introduces the two fundamental problems of fiscal policy-making in federal states that we are investigating in this book. It first explains why federal systems may be subject to coordination problems in the set-up and pursuit of consolidation policies that cause structural problems of deficit-making. Second-and this is our main concern-it explains why and to what extent such coordination problems, as well as the search for policy solutions to budget deficits and public debt (fiscal consolidation), may cause federal tensions. In other words, can coordination problems lead to federal conflicts and, perhaps, even have system-destabilizing consequences? Can a policy issue like deficit-making affect the federal equilibrium in such a way that the balance of power of federal relations is disturbed? Literature on federalism, especially in the fiscal federalism tradition, offers some valuable explanations for the coordination problem in fiscal policy-making. We will present and make use of this literature in order to develop our argument. However, this literature has provided much less insight into the second problem about the relationship of policy problems and federal stability. Our book seeks to fill in this gap. Therefore, this chapter presents a heuristic model that guides us in our empirical work on the consolidation policies of eleven federations and that addresses both the coordination problem and the stability of federations simultaneously. Our model draws on insights from recent attempts in comparative federalism to understand the “dynamics” of federalism (Benz and Broschek 2013a) and the “robustness” of federations (Bednar 2009). We will start by raising the question of why deficits are so attractive to politicians in general. Taking a public choice perspective helps us to understand why the deficit problem exists. Moving on to the specific situation of federal states, we show that the problem that federations face is that several territorial layers need to cooperate in order to solve the deficit problem. This obviously increases the complexity of the issue. Taking a closer look at federal states, we will then reveal more insights into the “logic of non-coordination” in federal consolidation policies and discuss it in terms of a “prisoners’ dilemma,” with the well-known problem of achieving unsatisfactory suboptimal outcomes. In order to show how

this dilemma might be solved, we will use some insights from the “second generation of fiscal federalism” (Iaryczower, Saiegh and Tommasi 1999; Weingast 2009). Furthermore, we will find that the adoption of “fiscal rules” has been one of the most prominent solutions in all advanced industrial states during the last twentyfive years and that federal states are no exception to that. Fiscal rules and budgetary frameworks are conceived as rule-based incentive structures that should change the preference order of deficit-minded politicians. Consequently, fiscal rules have been the main instrument used to solve the problem of deficit-making. In federal states, there are a number of reasons why fiscal rules may conflict with the interests of subnational governments and lead to federal conflicts. Therefore, we seek to investigate-and this is the main focus of our book-how such rules can be applied despite such conflicts. More generally, we want to find out how the federal stability can or cannot be maintained in doing so. This question leads us to the “politics” of federalism. Hence, a number of political structures of federal systems are presented. In particular, we use concepts of fiscal federalism and Bednar’s (2009) concept of “federal safeguards.” This concept helps us to explain the different “vulnerabilities” of federal states to federal conflicts and the outcomes of fiscal consolidation in terms of federal stability. To understand the “politics of consolidation policies,” we will highlight all three explanatory dimensions:

• First, the importance of the “dual” structure of federal problems, that is, the co-existence of policy problems and of problems of power that need to be dealt with if one wants to maintain “federal robustness”;

• Second, we shift the attention that is usually attributed to the “opportunistic behavior” of actors to the notion of “standard interests” which in our opinion gives a better understanding of the dynamics in the federal game;

• Third, we take a governance view of federal action by focusing on “coordination regimes” that entail fiscal incentive structures, federal safeguards and interaction systems. The four different “coordination regimes” we distinguish can be the explanation for variation in the capacity of federations to remain “robust” (be effective and maintain federal stability) or not when confronted with the problem of implementing consolidation policies to solve the deficit problem.