Fiscal Relations in Federal Countries....................................................................................Page 1 PROCESSES FOR ADJUSTING FEDERAL FINANCIAL RELATIONS: EXAMPLES

a) The importance of processes for adjusting federal financial relations The allocation of financial resources to each order of government within a federation is a fundamental feature for its effective operation. It is the allocation of these sources that enable or constrain governments in the exercise of their constitutionally assigned legislative and executive responsibilities. Furthermore, taxing powers and expenditure are themselves essential instruments affecting the ability of the various governments within a federation to influence and regulate the economy. But the issue is not simply one of constitutionally defining taxing and expenditure powers and intergovernmental transfers. Because the values of different revenue sources and the costs of different expenditure responsibilities inevitably change over time, no constitutional financial allocations can be expected to remain permanent. Consequently, all federations have found it necessary to establish processes and institutions for adjusting from time to time the intergovernmental financial relations. Among the elements requiring regular adjustment have been the vertical imbalances arising from changes in the revenue and expenditure requirements of each order of government, horizontal imbalances in the revenue capacities and expenditur