Introduction

The eight case studies of this edited volume connect two strands of federal studies, i.e., fiscal federalism and diversity accommodation, and are tasked with answering two closely interrelated questions. On the one hand, the different authors try to figure out if and to what extent the need to accommodate diversit(ies) has worked as a determinant of financial relations and their evolution, including a thorough investigation of which types of diversity are the drivers of this trajectory. On the other hand, they attempt to explain to what extent fiscal federalism has an overall positive and/or negative impact in accommodating diversities, thus resulting in institutional solutions with an integrative or disintegrative potential toward the federal system as a whole.

Put differently, the two questions should enable us to comprehend to what extent financial agreements and relations are successful in accommodating diversit(ies) and thus have an integrative potential, or vice versa, disregard existing diversities and end up exacerbating dormant tensions and triggering intergovernmental conflicts, thus manifesting a disintegrative potential.

This analysis starts from an observation of the different systems at stake from a constitutional law viewpoint, supplementing the analysis with an investigation of the practice and the role of politics in determining the overall equilibrium. The comparative observation of this type of examination brings out at least three critical points that deserve commentary, as each of them offers some insights drawn from the case studies investigated in this volume. These are: the cause-effect affair, the balance affair, and the participation affair.

First. The Cause-Effect Relation: A Complex Affair

The overall analysis rests on the assumption that synapses exist between these two domains of federal research, fiscal federalism and diversity accommodation, which could benefit from an integrated approach. Ultimately, an amplified view would allow us to approximate the causes of the investigated phenomena and appreciate the impact on its trajectories. However, isolating the different types of diversities and their precise impact on financial arrangements is not a simple and straightforward task.

Besides the multidimensional nature of diversity, which goes well beyond the differences that are traditionally placed under the magnifying glass, i.e., language, religion, ethnicity, or culture, the observation of the case studies brings out that the various differentiating factors frequently overlap or intersect one another and have a diversified spread across the territories that make up the federal system. These various circumstances hinder the understanding of what factor is the cause of what institutional setting. Put simply, ‘one argument can thus cause or hide another one’.Footnote 1

A layering of diversities is, for instance, found in Australia, where the financial agreements are meant to cope with strong horizontal imbalances caused by ample territorial diversity among the six States and the two self-governing territories. Subnational governments differ widely in community size (costs associated with big cities and very small communities), population growth and composition, remoteness, Indigenous status, and economic strength (e.g., mining production, property sales, taxable payrolls, natural disasters, and employees).

As such, large discrepancies exist in fiscal capacity and service cost. This is well reflected in the wide scope of the equalization program and of federal transfers in general, which have been adopted to accommodate existing diversities. Moreover, these programs are channeled into the system through the strong de facto involvement of SNGs. Despite the central role the Commonwealth Grant Commission plays in the apportionment of resources in general and in equalization in particular, the Commission’s role is complemented in practice by ‘sophisticated institutional arrangements’, in which ‘the States are complicit and adept at working the system to their advantage’.Footnote 2

Brazil is another interesting example in which territorial inequalities are rooted in strong socioeconomic inequalities, resulting from the concentration of industrial and economic activities in the South and Southeast of the Country, with the North and the Northeast being rural and underdeveloped. The Midwest experienced rapid growth and moved away from the group of the poor states to the group of the rich ones. The existing imbalances have been determinant in forging the design of fiscal federalism. However, the outcomes are not effective in coping with and reducing inequality to the extent that the persistence of this ‘disease’ is telling.

In Spain, diversity comes from many different perspectives. The State of Autonomies combines de facto diversity, based on factors such as geography, climate, language, population, or income, with de jure asymmetries rooted in the Constitution. One of the most significant constitutionally enshrined asymmetries in Spain is the different tax regime that the Basque Country and Navarra enjoy as a legacy of their historical rights (fueros). The foral system is radically different to that of the common-system Autonomous Communities, being based on bilateral negotiations between these territories and the State. Although these regions run all the risks themselves with no revenue guarantees provided by the central government, the foral system, in practice, has resulted in a financially advantageous position for these territories.

Besides this set of diversity features that are pretty common to a wide range of countries and territories within them, certainly those analyzed in this book, there are also other differential factors related to cultural, religious, ethnic, and politics that affect overall fewer cases, and that can be either concentrated in an area or scattered across the country, depending on extra-legal factors of the case at stake or, in certain cases such as South Africa, on choices of constitutional design.

In South Africa, political, economic, linguistic, and geographic diversities have influenced fiscal federalism, as well as intergovernmental relations thereof. An attempt to give them accommodation is the provincial equitable share (PES), which is allocated to each of the nine provinces through a largely demographically driven formula. The structure and underlying variables of which are published each year by the SA National Treasury as part of the annual budget review documents. In particular, the variables on which the PES formula is based reflect the marked differences in the spatial distribution of economic activity and poverty across the nine provinces.

Within this scenario, Canada is the paradigm of a multinational federation. The need to ensure the coexistence of different peoples under a common system provides an additional element to the existing territorial complexity. Within it, an important variety of minority national communities is found (French Canada, English-speaking Canada, and Indigenous Canada, the latter including the First NationsFootnote 3), each of them with its own internal specificities and, not surprisingly, a specific financial arrangement. In fact, the different groups are granted four different models of fiscal federalism, which in theory should accommodate the existing diversities as well as their needs or interests: one agreement exists within the federal government and the provinces, another one within the former and the territories, a third one defines the relations between the federal government and the First Nations, and a fourth one concerns the Indigenous Peoples.

However, the extent to which diversities are accommodated is different among the groups, giving rise to de jure asymmetries on top of the de facto asymmetries. For instance, while provinces have access to several tax-bases and natural resources revenues, and are granted ample control over autonomous revenue sources, this is not the same for territories. For the latter, the majority of revenues are dependent (and thus controlled) by the federal government. Furthermore, the control over natural resources remains a debated issue, with different arrangements across the three territories. The situation is completely different for First Nations, which still lack appropriate funding mechanisms, despite some improvements that were theoretically expected with the changes to the Indian Act introduced from 1988 onward. Finally, the fourth model is still underdeveloped and markedly complex, especially because each Indigenous community is subject to diverse conditions, and at present, more than twenty-five arrangements have been reached with the different Indigenous governments.

India is another example of this kind. Cultural heterogeneity is commonly intertwined with a wide economic gap, in a combination that frequently gives rise to ethnic conflicts and, in certain cases, secessionist attempts (e.g., in Assam, Punjab, and Kashmir). Partly due to the possibility of comparing multiple examples within the same order, the Indian case is a good illustration to give evidence of the impossibility of clearly separating the impact caused by one factor compared to another. Conversely, it emerges that it is precisely the interplay between multiple factors (e.g., cultural and economic) that pave the way to centrifugal drives. At the same time, however, economic deprivation or (a perception of) injustices alone are not able to fire up separatist claims without the concurrency of a sense of separate identity from the rest of the population in a country.

This is clearly shown in both the Catalan and the Scottish cases, in which identity issues are coupled with a sense of unfairness concerning the received economic treatment.

Moreover, when it comes to Catalonia, the fact this is a rich territory further fuels the overall resentment, also because the costs of secession tend to be lower than for poorer entities. The overall result is that cultural claims frequently hide economic claims. For instance, the secessionist procés in Catalonia cannot be understood without the frustration caused by the great recession and its deep consequences in Spain, a situation that was taken advantage of by the Catalan government to ask for a new fiscal arrangement in a similar fashion to those of the Basque Country and Navarra. The rejection of this claim by the central government in 2012 was rapidly instrumentalized as a catalyst for Catalan independence, with the claim of unfair economic treatment being one of the main driving forces of the secessionist movement.

On the contrary, economic stability and remaining in the EU’s common market were decisive factors for the rejection of the Scottish independence option in 2014. However, the United Kingdom’s exit from the European Union after the 2016 referendum, in which the majority of the Scottish population opted to remain, substantially changed the landscape, strengthening support for secession as Brexit is perceived to be a weakening force for the Scottish economy.

While it is undisputed that diversity as a conceptual category is a common feature of every federal system, it is tough to establish which differential factor was, and is, decisive with respect to a given (fiscal) federal equilibrium and its maintenance over time. In other words, it is difficult, if not impossible, to reconstruct whether and in what terms a specific differential factor rather than another was found to be determinant in favor of choosing one institutional solution over another, or of prompting its reform. The diversities that mark each federal system surely impact the overall balance between financial autonomy and solidarity, but it is not always easy or straightforward to assess the influence each one has exerted on such equilibrium and its change over time. Following the political debate before and after the conclusion of an agreement could facilitate the perception of the cause-effect relation. In fact, the arguments brought forward by the different entities as individuals or as a group promote an advancement in the understanding of the cause-effect nexus. Such an investigative approach must however be cautioned, as it can be misleading in some cases. There are in fact instances in which technical arguments conceal territorial interests that would benefit one unit over another. Put differently, the force of a technical argument can be used to mask political wills expressed by specific territorial interests.

Such an approach is a valuable tool for understanding if the necessary precautions are taken. The Spanish case is remarkable in this respect. In fact, the factors to which the population criteria should be adjusted to in order to share the resources of the Fund for the Guarantee of Fundamental Public Services have little to do with the economic rationale, but are rather the result of the political compromise, whereby an Autonomous Community ends up pushing for a certain correction because it goes to the benefit of its territory and not because it is more effective with respect to the goal pursued with the fund.

The same goes for equalization in Australia. Until the last reform adopted in 2018, the system was meant to provide a full equalization of existing disparities. Being a zero-sum game, it should come as no surprise that the richest States, such as Western Australia, tended to question the merits and effectiveness of the system, giving rise to political tensions both between the States as well as the States and the Commonwealth. With the ‘Treasury Laws Amendment Act 2018’ (Making Sure Every State and Territory Gets Their Fair Share of GST), the rules of the game have been changed to ensure—among other things—a gradual transition from full to ‘reasonable’ equalization. Such a result, combined with the role of intergovernmental institutions and agreements in managing the political dimension of fiscal federalism, supports the conclusion that this change is, with a good approximation, the result of an accommodation of diversity—in this case of economic nature.

Second. Financial Tools for Diversity Accommodation: the (Fair) Balance Affair

Each financial constitution is a balance between autonomy and solidarity. This is done through two main sets of instruments: i.e., fiscal autonomy and financial equalization. Meant in a broad sense, the first one includes all subnational revenues whose amount is linked to the principle of territoriality, and with respect to which entities eventually enjoy a degree of legislative and/or administrative autonomy. The second one includes all grants whose amount is not linked to the principle of territoriality, i.e., all resources that are not proportional to the fiscal capacity of the territory.

The combination of these two pillars is one of the key determinants of the overall federal equilibrium. The latter, however, is evidently changing not only between the single cases, but also within the same system: it transforms over time and space as legal or contextual factors transform themselves. If the presence of a quid of differentiation constitutes an inherent component of any federal system, the extent to which subnational governments are vested with tax autonomy and the scope of the equalization mechanisms is central in determining the overall degree of differentiation allowed for a system at a given time.

The cases analyzed in the volume show a great variety in such balancing. Indeed, we find subnational governments enjoying extensive fiscal autonomy, such as the Canadian Provinces and the Spanish Autonomous Communities. In Canada, a multitude of financial arrangements do exist to address the diversities within the federation. Along with the federal government, the provinces have extensive tax autonomy. Also, in Spain, Autonomous Communities have substantial autonomy over taxes, but this does not entail a completely autonomous exercise of taxing powers and takes forms resembling those of  a ‘tax-base sharing’. Predominantly, the Autonomous Communities have a large tax-varying power over the so-called ceded taxes. These are established by the federal level, which can then opt for ceding to subnational governments a share of the yield together with certain legislative and administrative powers.

Apart from these two cases, however, the other systems explored in the volume record overall a strong centralization of the power to tax. This is the case in Italy, where both ordinary and special regions have little authority to tax, basically limited to a tax-varying power over the few devolved taxes. Similarly, the Constitution of India assigns most broad-based taxes to the center, including taxes on income and wealth from non-agricultural sources, corporation tax, taxes on production (excluding those on alcoholic liquors), and customs duty. In the UK, only Scotland is vested with the power to set a Scottish rate on income tax. For its part, in Brazil, subnational governments do not have full autonomy to apply their most important taxes, narrowing the scope of the states’ tax base. In the same vein, taxation powers in South Africa are highly centralized because of historical reasons, with the African National Congress being reluctant to share the tax bases with the provinces.

In these systems, fiscal autonomy is basically reduced to the existence of tax-revenue sharing schemes, which can be based either on the principle of territoriality or on redistribution criteria. The latter typically combines equalization mechanisms with federal transfers of various kinds. It is not by chance that Australia has one of the strongest systems of fiscal equalization in the federal world, introduced and developed over time to cope with an ample vertical fiscal imbalance, coupled with a deep horizontal imbalance. Also, Canada has a rather strong equalization scheme, but the latter coexists—as mentioned above—with a significant tax autonomy of provincial governments. Nevertheless, the latter has been mitigated over the years by the established practice of concluding ‘tax rental agreements’, which de facto shift certain decisions to the federal government, or at least limit the margins of allowable tax differentiation.

At the same time, the perception of fairness of a given balance changes over time as circumstances transform. The equilibrium between autonomy and solidarity components in financial relations has not only to be reached, but it has to be kept with continuing adaptions to the evolving context.

Such a conclusion brings out a paradox necessarily associated with any federal system of public finance. On the one hand, the very function of fiscal autonomy and financial equalization is to accommodate interterritorial diversities. On the other hand, the balance reached for the purpose of diversity accommodation inevitably gives rise to intergovernmental conflicts. Financial relations necessarily have an ‘adversarial’ nature, as diversities characterizing different entities will never find complete satisfaction within a given federal equilibrium.

This is not only due to the need to balance composite and often opposing interests and needs, but precisely because a certain degree of differentiation belongs to the essence of a federal system, without which federalism simply fails to exist. Aside from pitting the richer against the poorer entities, where the former typically want more fiscal autonomy and the latter more redistribution of resources, intergovernmental relations are further complicated when these differential factors are overlaid with other ones of a cultural and identitarian nature. In these cases, the dependence on resources from another level of government could have an assimilating, diversity-eroding impact. In contrast, in another system, such a financial setting could be perceived as granting an adequate financial endowment, i.e., a fair balance. This could occur through stringent conditions attached to the use of transfers. This is the case in India (e.g., Assam, Punjab, and Kashmir). The Union government does not ensure fiscal autonomy to regions with minority groups, especially where secessionist movements exist. Rather, these territories are kept in a position of strong financial dependence from the center, so that the costs of secession are high and the benefits of staying in the Union are very remunerative.

Albeit with notable differences, a similar dynamic occurs in the United Kingdom, where the devolved administrations are dependent on the decisions made by the UK government in relation to England. In this regard, Scotland experiences an analogous pattern with, at least, the existence of a perception of such dependency, a factor that precisely played an influential role in supporting the secessionist claim. A similar perception can be found in Spain, where some Autonomous Communities believe the State does not leave them sufficient margin to exercise their financial (or tax) autonomy, damaging their growth potential by perpetuating a system with, what they understand to be, clearly centralizing features. Paradoxically, this view is not exclusive to those subnational governments where secessionist claims exist, as this vision of the model is also shared by the Autonomous Community of Madrid.

A somewhat similar situation is that of the Italian regions seeking the application of Article 116.3 of the Constitution, that is the constitutional provision that allows access to augmented autonomy under certain conditions. The pioneers of this new way of Italian regionalism are, not by chance, three of the richest regions, and where there exists even a weak identity factor, this has been exploited to try and push for the advancement along this institutional pathway. For instance, this is the case of the referendum held by the Veneto Region in 2017. It is of interest to emphasize that the questions that failed the judicial scrutiny of the constitutional court clearly exhibit an extra ordinem nature of the ‘contestation’. Not only because of the request that the Veneto region may become an independent and sovereign republic, but also because of the other questions which show that the issue of ‘adequate distribution of resources between regions’ is anything but perceived as fair and accepted.

In practice, an adequate, i.e., fairly perceived and broadly accepted, compromise in this field is difficult to achieve. The paradox inherent to financial agreements, above illustrated, makes any reached balance temporary by nature, sooner or later giving rise to intergovernmental conflicts. At the same time, the comparative observation of the practice makes it emerge that fiscal federalism tends to be more effective in accommodating diversities if financial compensation is perceived as fair, and it is perceived as fair if the differentiated interests are channeled through the decision-making process.

Third. The Participation Affair

The success of financial agreements in governing these dynamics—balancing autonomy and solidarity, while guaranteeing a certain stability over time and keeping conflicts within the constitutional borders—varies from one case to another. Despite the ample variety of existing solutions, one element stands out from the rest. This is the degree of acceptance by subnational governments of the rules of the game. This circumstance has to do with the level of trust in the system, a factor that is strongly influenced by the effectiveness of subnational participation in decision-making over fiscal federalism.

A basic assumption in this respect is that diversit(ies) have an impact and are successfully accommodated, as long as subnational governments are given an effective voice in the decision-making process, and the related factors and interests are channeled through the political process, i.e., subnational governments participate in the making and the changing of decisions on fiscal federalism.

With respect to this element comparative analysis reveals a wide variety of architectural solutions  and of the interests effectively represented by the different paradigms, as well as ample gradation of subnational government involvement. Moreover, at least in part, this is independent of the legal force accorded to such participation. In other words, while the mandatory and binding nature of the positions expressed by different levels of government (or individual entities) is a strong guarantee for subnational autonomy, even where such a position is not accorded legal force, the political nature often ends up playing a de facto binding role (e.g., in Spain). This is especially true where there is a lack of consensus on alternative solutions, and even in cases where the position is not unanimously accepted (e.g., Australia). If anything, those ‘outside the choir’ may, over time, catalyze the consensus needed to call the decision further into question.

The idea is that the financial dimension of federal systems has a strong impact on intergovernmental dynamics. Besides being a ‘cause’ of conflicts, fiscal federalism can be a tool of intergovernmental ‘conflict management’. However, the extent to which a financial agreement is successful in this respect is influenced by the degree of acceptance of a given financial setting, a factor the latter that is very much linked to the degree of subnational government participation in financial-related decisions and the extent to which the federal equilibrium reflects existing diversities and gives them all a fair (balanced) accommodation.

In this regard, a central role is played by the involvement of subnational governments in determining the rules and the limits of intergovernmental financial dynamics. When participation is effective, there is a concrete chance that the different interests are given a voice, and thus existing contestations tend to be placed within the constitutional borders. Put differently, contestations exist, but they do not challenge the existence of the financial arrangements or the unity of the Country.

A sort of equilibrium has been reached in Australia. There, financial equalization has been treated as a technical problem credited to the Commonwealth Grants Commission (CGC), an independent and statutory body beyond the political arena, vested with the task of advising the Commonwealth on the GST redistribution among States and Territories, and providing recommendations in accordance with the terms of reference of the Commonwealth Treasurer. However, the Commission’s role is complemented in practice, to the extent that the financial rules of subnational financing are mostly the result of intergovernmental agreements reached among the executives of the two levels of government. Numerous forums exist for easing financial relations between the Commonwealth and the States, involving the respective executive at the different levels. At the peak there is the newly established National Cabinet, through which the Commonwealth and the States enter into agreements and make all political decisions related to financial relations.

The comprehensive intergovernmental process, overseen by the National Cabinet and operating across multiple hierarchical tiers, constitutes a substantial driver of “hyperexecutive federalism”. While these accords primarily assume the form of “soft law,” characterizing their provisions solely in political or moral terms oversimplifies their nature. Despite the theoretical possibility of parliamentary endorsement modifying agreements deemed “constitutionally unenforceable”, empirical evidence suggests the stability of such agreements over time is due to their underpinning by robust political commitment. This entails that a broad consensus is necessitated for any alteration of the status quo.

Simultaneously, individual claims may encounter frustration; for instance, the Northern Territory lacks mechanisms to secure supplementary resources. In stark contrast, economically robust Western Australia has achieved notable success in advocating for a transition from full to partial equalization. This advocacy is rooted in the inefficiencies engendered by the prior system. Wealthier entities have thus been able to recalibrate the system in their favor, demonstrating that economic prowess can function as a catalyst for transformative change. Divergent perspectives on the attributes and ambit of equalization periodically surface among the States, particularly during consultations conducted by the Commonwealth Grants Commission. These perspectives predominantly mirror the economic potency of the respective territory. Although some States have exhibited shifts or tempered their stances over time, the discourse primarily revolves around the impact of equalization on efficiency and incentivizing growth. Given the zero-sum nature of equalization in Australia, with the system designed to effectuate complete equalization of extant disparities, the wealthiest States, typified by Western Australia, often interrogate the efficacy and merits of the system. This dynamic begets political frictions between the States and, concurrently, between the States and the Commonwealth, which are channeled and accommodated through the multiple intergovernmental fora.

Conversely, inadequate or feeble participation more readily provides a fertile ground for the emergence of subversive modes of dissent from the established constitutional order. Thus, the ultimate outcome hinges significantly on the contours of decision-making processes, particularly the extent to which subnational governmental interests are piped through this process and act as determinants of its outcomes. The fact that Canada is a multinational federation adds complexity to this frame, as there exists a plurality of self-identified political communities, and the institutional design of the federation should ensure the empowerment of all of them in a satisfactory way. However, this is not the case in practice. The lack of involvement of the different provinces and territories in Canada opens the way for the federal government to use the transfers as a ‘political weapon’ to reward compliance with priorities set by the federal level. Formally speaking, the decision-making power over the different aspects of financial relations—except for the case a constitutional amendment is needed—is vested solely in the federal government, with changes being enacted as part of the federal budget, as they represent federal spending programs.

This is not the case for all financial agreements. In practice, provinces and territories are frequently represented through intergovernmental meetings, which—although informal in nature—ensure the participation of subnational governments in the negotiation process. Not surprisingly, provinces enjoy substantial independence from the federal government in terms of revenues. In comparison, for territories and Indigenous Peoples, data shows a substantial reliance on federal transfers, and, in certain cases, ‘chronic underfunding’.

In setting the balance between autonomy and solidarity, participation thus appears to play a key role. However, although provinces can influence the decision-making process, the fact that there is no legal obligation to do so makes it possible for the federal government to unilaterally alter the equalization compact, or extend it in its present form without any intervention from the former as it happened in 2018 and 2023.

With respect to this, the Spanish case is interesting, as it emphasizes such a trajectory further on. The Fiscal and Financial Policy Council (FFPC) functions as the pivotal body tasked with coordinating fiscal interactions between the central state and the Autonomous Communities (ACs). Comprising the National Minister of Finance along with the Finance Ministers of each Autonomous Community (augmented by the Finance Councilors of the Autonomous Cities of Ceuta and Melilla), this intergovernmental body assumes a key role in shaping the fiscal landscape. While the accords forged within the FFPC lack legally binding force, their practical political implications are substantial. Notably, these recommendations can be endorsed by a two-thirds majority in an initial vote, with a simple majority sufficing in a subsequent round. It is pertinent to underscore the voting mechanism, wherein the central government holds a position of privilege vis-à-vis the Autonomous Communities. Whereas each Community wields one vote, the central government commands a vote count equivalent to the aggregate of all Communities. This preeminence on the part of the central authority curtails the decision-making capacity of subnational governments, for in a subsequent vote, the central government can advance with the support of just a solitary Autonomous Community. This compression of subnational interests, in favor of federal interests, has, over time, propelled a shift toward bilateral relations, particularly in the context of more affluent entities. This evolution has been so pronounced that it necessitated intervention by the Constitutional Court to delineate the interplay between the principles of multilateralism and bilaterality.

This is quite evident if one looks at the functioning of the system, as this arrangement of powers also emerges in the legal framework, where instances are found in which the legislature provides for deviations from multilateralism, through the involvement of joint state-autonomous community commissions. In the regulatory framework, though, the contrast is only apparent. In fact, in the Spanish legal system, both principles—multilateralism and bilateralism—come to legitimately shape intergovernmental financial relations. It could not be otherwise because both bilaterality and institutional asymmetry belong to the essence of the so-called ‘dispositive principle’. However, for the coexistence of one and the other, compliance with certain rules is necessary, as illustrated by the Constitutional Court. In sum, the FFPC, as a multilateral forum, is assigned powers in relation to all those aspects of the financial activities of the Autonomous Communities and of the public finance system that—by nature—require coordinated implementation. As such, “the intervention of the Joint Commission can neither ignore nor circumvent this framework of interterritorial coordination and cooperation, but must necessarily respect it”. The result is that the multilateral dimension must be integrated with the functions that are attributed to the Joint Commissions both by the Statutes and by the LOFCA itself, which as bilateral bodies are called upon “to give concrete application in each Community to the criteria agreed upon in the sense of the CPFF”.Footnote 4 This is to say that bilateral agreements can be made, but they must be gentlemen’s agreements. Otherwise, if decisions were made to depend on the will of one single entity, it would be like “granting an Autonomous Community a veto right over the powers of the State”, thus nullifying its exclusive power on public finance and the powers granted to it in terms of coordination and solidarity.Footnote 5

If this dynamic is brought back to the practice, the lesson to be learnt is that those diversified interests that are channeled through the decision-making process, and are thus given a chance to be discussed and represented in the institutional dimension, tend to have greater chances if not to determine the result of the negotiation process, at least to influence its trajectories.

Subnational participation remains rather low in South Africa. This is due to the absence of a clear commitment by the dominant party to a model of federal decentralization. The desirability of subnational structures is still debated, leading to unstructured cooperation in fiscal intergovernmental agreements. In fact, the provinces, a second level of government, have not been consolidated. Rather, they are experiencing a gradual process of hollowing out in which their functions are either transferred up to the central government or down to cities and municipalities. Advances in strengthening the position of the provinces in financial matters need to pass for a higher involvement in the decision-making process, primarily over the expenditure priorities and the allocation of funding. In Brazil, the dynamic is different, as it is the over representation of sparsely populated areas in both legislative chambers that has consolidated a model in which contrasting views on the fiscal structure and the distribution of transfers exist. The conjunction of interests of some of these states with the rich and densely populated states has resulted in the latter abusing the institutional system to prevent further redistribution. However, political fragmentation, together with institutional legacies and economic dynamics, is a potent obstacle to an institutional reform that would give the states a powerful voice in shaping future intergovernmental fiscal relations and transfers.

The nexus is clearly emphasized in India, providing a test case for confirmation of the so-called ‘Twin Catalyst Thesis’. What is of interest here is the contribution that the Indian case offers about the role of the institutional dimension of fiscal federalism. In India, the thesis set forth is verified where two preconditions coexist: the presence of ethnically and economically marginalized minority groups, and the inability of intergovernmental institutions to provide an effective response to the needs emerging from them. Therefore, if the lack of adequate intergovernmental institutions has led to the substantial political disempowerment of subnational governments and has in many circumstances paved the way for secessionist movements, more generally the comparative perspective shows that the lack of institutions and rules ensuring the effective involvement of subnational governments impinge the degree of acceptance of the rules and practices of fiscal federalism, as such increasing the inherent instability of federal systems.

In this respect, the institutionalization of forms of contestation between the national and subnational governments can be effective in ensuring the constant maintenance of the constitutional order, while granting a (dynamic) equilibrium among the opposing forces. However, if the concept of ‘contestatory federalism’ is adapted to the nature and function of fiscal federalism, it emerges that contestations can both determine the maintenance and the evolution of a system, or its breach. The overall result very much depends on the tools the different levels of government can resort to contest the existing equilibrium and favor its change.