Grants. Problems of fiscal federalism


Grants. Problems of fiscal federalism

Fiscal federalism, financial relations between units of governments in a federal government system (usually how federal or central governments fund state and local governments). Fiscal federalism is part of broader public finance discipline developed by German-born American economist Richard Musgrave in 1959.

Fiscal federalism deals with the division of governmental functions and financial relations among levels of government. The theory of fiscal federalism assumes that a federal system of government can be efficient and effective at solving problems governments face today, such as just distribution of income, efficient and effective allocation of resources, and economic stability.

Optimal fiscal federalism - the question of which activities should take place at which level of government.


example: USA

The Tiebout model suggests that the provision of local public goods can be efficient if individu- als “vote with their feet” by moving to towns with others who share their tastes for public goods. The Tiebout model suggests that spending with strong tax-benefit linkages (such as public safety) should occur at the local level and that spending with weaker tax-benefit linkages (such as redistribution under cash welfare) should occur at higher levels of government.

Instruments of intergovernmental finance:

If higher levels of government decide for one of the two reasons stated to redis- tribute across lower levels of government, they do so through intergovernmental grants, which are cash transfers from one level of government to another.

matching grant- A grant, the amount of which is tied to the amount of spending by the local community.

block grant - A grant of some fixed amount with no mandate on how it is to be spent.

conditional block grant - A grant of some fixed amount with a mandate that the money be spent in a particular way.

How Are Social Security Benefits Paid Out?


Full Benefits Age (FBA)The age at which a Social Security recipient receives full retirement benefits (Primary Insurance Amount).

Early Entitlement Age (EEA)The earliest age at whicha Social Security recipient canreceive reduced benefits.

Individuals can receive their PIA starting at age 66 and 4 months, which is the Full Benefits Age (FBA). As a result of 1983 legislation (discussed in more detail later in this chapter), the FBA is currently slated to rise to age 67 for those born in 1960 or later.12 It is possible to receive benefits as early as age 62, which is the Early Entitlement Age (EEA).For each year of benefits claimed before age 65, however, there is an actuarial reduction in benefits of 6.67% per year (for the 3 years before the FBA) or 5% per year (for earlier months). Individuals who claim their benefits at age 62 today receive about 27% less in benefits than those who claim benefits at age 65. This is called an “actuarial” reduction because it is designed to compensate for the fact that individuals who take benefits early receive them for more years. That is, if you and a friend are the same age, and your friend claims benefits at age 62 and you claim them at age 66, and you both live to age 75, then your friend gets three more years of benefits than you do. The reduction in benefits that your friend receives each year is designed to compensate for the fact that he gets three additional years of benefits. With the actuarial adjustment, you can both expect to get the same total amount of benefits in your retirement years. Similarly, if you decide to wait past full benefits age to claim benefits, you receive a Delayed Retirement Credit (DRC), which raises your benefits for each year of delay by 8%.



1. A cyclically adjusted budget deficit adjusts for which of the following on the effect of the budget deficit?

D. Both a and c

2. Suppose the federal government has to borrow money because it has budget deficits. What is the mechanism through which this borrowing might crowd out private borrowing and capital accumulation?

A. Interest rates

3. Suppose that the government were to establish a federally funded health care service for everyone, where the government directly paid doctors and medical practitioners. This would be an example of which of the following types of intervention?

E. Public provision

4. Suppose that to look at the effect of the TANF program on labor supply, researchers were to look at how labor supply by poor households changed over the last 20 years and compare that to changes in the income guarantee over time. This is an example of

A. time series analysis.


5. Suppose that one study were to estimate the effect of public smoking bans by looking at rates of smoking across states over time when some of those states adopt smoking bans. This study takes which approach?

D. Quasi-experiment


6. Which of the following are true statements?

E. None of the above

7. Which of the following are true statements?

E. None of the above


8. Which of the following is true?

D. State governments have been able to control deficits for long periods of time while the federal government has not.


9. Which of the following is defined as the private marginal benefit to the consumers plus any costs associated with the consumption of the good that are imposed on others but for which those others are not fully compensated?

C. Social marginal benefit


10. If SUVs produce a negative externality, taxing the buyers of SUVs would do which of the following?

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