The Fiscal Crisis Down Below

PALO ALTO – Sub-national governments – states, countries, cities, provinces, towns, and special districts – play different roles from country to country, but usually deliver important public services such as police and fire protection, transportation, education, health care, and welfare. In many countries, their fiscal position has collapsed under the combined weight of mismanagement and the global economic and financial crisis.

The relationship between sub-national and central governments includes the general division of responsibilities for providing and financing public services; national subsidies that at least partly pay for various services delivered locally; and tax collection.

In the United States, the federal government has primary responsibility for defense, public old-age pensions (Social Security), and health care for the elderly (Medicare); sub-national governments are responsible for education and law enforcement. Health care for the poor (Medicaid) is a shared responsibility. Matching funds flow from the federal government to state and local governments by formulae delineating the shared responsibilities. Some of these formulae allow sub-national governments wide discretion; others do not.

The global economic and financial crisis has precipitated an immense expansion of central government spending, borrowing (and hence future taxing), lending, regulation, and mandates, some in “aid” to sub-national governments (about $200 billion in the US stimulus bill). A key question is whether central governments’ power worldwide will expand permanently – over not only the private economy, but also over sub-national governments.