Budget Consolidation and Fiscal Equalisation System

The consolidation of budgets is a task for the whole of government, and sustainable success requires cooperation of federal, state and local governments. The fiscal relations between the government tiers, institutionalised in the revenue sharing system, play a pivotal role in this context. Budget consolidation can be both revenue- and expenditure-based. Using data from national accounts and historical consolidation episodes, this study examines mutual interdependencies of spending and revenues between levels of government in the consolidation of budgets. The rules established in the fiscal equalisation architecture tend to favour a revenue-based consolidation strategy on the part of the federal government. However, budgets of states and municipalities benefit only if the vertical division keys of joint taxes are not adjusted unilaterally in favour of the federal level.