The influence of federalism on fiscal policy making

Abstract. This article attempts to refine the statement that federal states face difficulties in fiscal policy making because of the territorial division of powers by comparing two federal countries, Canada and Germany. These two countries differ in terms of their type of federalism: Canada displaying a power‐separation system and Germany corresponding to a power‐sharing type. According to the authors, the territorial factor influences fiscal policy making through the distribution of taxing and spending powers as well as through patterns of intergovernmental relations. The use of fiscal policy instruments and the likely effects on conflict and cooperation in those two countries is discussed with empirical evidence. The authors come to the conclusion that federalism is indeed a constraint on fiscal policy making, but that the two types of power division face different obstacles and deal differently with fiscal problems. In the power‐separation system of Canada, the federal government has encompassing competencies to use fiscal policy instruments unilaterally and without restraint, but faces a lack of concerted action with the provinces which reduces its scope of action in fiscal policy making. In the power‐sharing system in Germany, concerted action facilitates macroeconomic stabilisation strategies but the compulsory negotiation system distorts the use of fiscal policy instruments by distributive bargaining.