Intergovernmental Relations and Federalism

Why this matters in public value

A resident who cannot get a pothole fixed, a school place confirmed, and a benefit claim processed in the same week rarely cares which tier of government is responsible for which failure. They experience one relationship with the state, even though that relationship is, in almost every country, actually several governments acting in the same territory: a national government, one or more regional or state governments, and a local authority, each with its own electorate, its own budget, and often its own political party in charge. When those governments coordinate well, a citizen never notices the seams. When they do not, the seams become the story — a flood-response effort that stalls because no single body owns evacuation and shelter together, or a housing policy that a national government funds and a local authority is blamed for failing to deliver.

This is a distinct problem from the ones the rest of Part 3 addresses. Topic 3.1 sets out the paradigms of how any one public organization is run — hierarchy, market, network, platform (see Topic 3.1 — Public Administration Systems and Models); this topic asks a prior question, about which organization gets to decide what in the first place, when decision rights are split across levels that answer to different electorates and rarely share a budget line. Topic 3.3 sets out how a single government builds and executes its own budget (see Topic 3.3 — Public Finance and Budgeting); this topic extends that machinery across levels, into the transfers, shared taxes, and unfunded mandates that determine whether a local or regional government's budget bears any relation to the responsibilities it has been handed.

The stakes have risen for a practical reason: most of the twenty-first century's hardest problems — climate adaptation, an ageing population's care needs, housing supply, public health — do not respect administrative boundaries, yet the fiscal and legal authority to act on them is still parcelled out among levels of government designed for an earlier set of problems. A leader who understands only their own tier's mandate, budget, and electorate will keep discovering that the public value they are trying to create depends on a decision, or a transfer of money, that someone else controls.

Core concepts

Federalism is a system of government in which power is constitutionally divided between a national or federal government and constituent regional governments — states, provinces, cantons, or similar — such that neither level can unilaterally abolish the other's authority; the federalism article on Wikipedia frames this as combining a general level of government with regional sub-units while dividing governing power between them. A unitary state, by contrast, vests supreme authority in a single central government, which may create, redraw, or abolish sub-national units and can, in principle, recentralize any power it has devolved (see unitary state). Very few real systems sit at either pure extreme; most occupy a spectrum, with a fully centralized unitary state at one end, a confederation of largely sovereign states cooperating by treaty at the other (see confederation), and federations and devolved unitary states occupying the middle ground.

Devolution is the statutory transfer of specified powers from a central government to a subnational level, without the constituent unit acquiring the entrenched, constitutionally protected status a federal state's regions hold (see devolution). The practical difference matters more than it first appears: a devolved parliament or assembly typically exercises power that the national legislature granted it by ordinary statute and could, in principle, amend or withdraw, whereas a federal region's powers are usually protected by a constitution that the national government cannot alter alone. Home rule describes a related but narrower pattern, common at city or colonial-territory level, in which a jurisdiction is granted self-governing authority over its own local affairs by the higher level that retains ultimate sovereignty (see home rule). A country can combine all three patterns at once — a federal division of powers between national and state government, home rule for its largest cities, and a devolved capital-territory government — which is why the federal/unitary label on a country's constitution is a starting point for analysis, not the end of it.

Subsidiarity is the principle that a decision or a function should be handled by the lowest level of government or organization competent to handle it effectively, with higher levels intervening only when the lower level genuinely cannot act alone (see subsidiarity). It originated in Catholic social teaching and was later written into the treaty basis of the European Union as a governing principle for deciding when the Union should act rather than its member states; the appeal of subsidiarity is that it gives a defensible answer to 'which level should decide this' that does not depend on which level happens to hold the power today. Its limit is that 'competent to handle it effectively' is rarely self-evident and is itself a contested political judgement — a national government and a regional government can each sincerely believe they, not the other, are the competent level for the same function, and subsidiarity supplies no mechanical tie-breaker.

Fiscal federalism is the subfield of public economics concerned with which government functions and revenue instruments should be centralized and which should be devolved to lower levels, and how money should move between levels once that assignment is made (see fiscal federalism). The standard normative starting point, associated with the economist Wallace Oates, holds that redistribution and macroeconomic stabilization belong with the central government, because a generous local authority attracts the people who need help and repels the taxpayers who fund it, while allocation of many public services is better handled locally, because local governments can tailor provision to local preferences that a national government cannot observe as precisely. This is a normative benchmark rather than a description of how any actual country assigns its functions, and this topic treats it as a lens for asking why an assignment departs from it, not as a rule any government is obliged to follow.

Vertical fiscal imbalance is the everyday practical problem fiscal federalism exists to solve: subnational governments are typically assigned more spending responsibility than their own revenue-raising capacity can fund, because the most efficient, hardest-to-evade tax bases — income and consumption taxes above all — are easiest to administer nationally, while many of the services citizens most visibly need are cheapest to deliver locally. Horizontal fiscal imbalance is the companion problem across regions at the same level: a resource-rich region or a wealthy metropolitan area can raise far more revenue from the same tax rate than a poorer region can, so uniform local tax rates produce wildly uneven service levels unless something corrects for it. Equalization payments are the standard correction: cash transfers from a central government to subnational governments, calculated to offset differences in the subnational governments' own revenue-raising capacity or in their cost of providing a comparable service level, so that a resident of a poorer region can expect a broadly similar standard of public service to a resident of a richer one for a broadly similar tax burden (see equalization payments). Canada, Australia, Germany, and several other federations run formal, formula-based equalization systems; the formula itself is one of the most politically fought-over documents in each of those countries, because every parameter choice moves real money between regions.

A grant-in-aid is money a higher level of government allocates to a lower level to fund a specific service or project, distinct from unconditional equalization because it typically carries conditions on how the money is spent (see grant-in-aid). Grants sit on a spectrum from tightly conditional — earmarked for one named programme, with detailed reporting requirements — to a block grant that bundles several purposes with wide local discretion over how to spend within them; central governments generally prefer the former, because it lets them claim credit and enforce standards, while subnational governments generally prefer the latter, because it lets them match spending to genuinely local priorities. An unfunded mandate is the pathology at the conditional end of that spectrum: a higher level of government requires a lower level to provide a service or meet a standard without transferring revenue sufficient to cover the added cost, effectively exporting a political decision's fiscal consequences to a government that did not make it and often cannot resist it.

Intergovernmental relations is the umbrella term for the ongoing machinery — formal councils, standing committees, funding agreements, informal bargaining — through which governments at different levels coordinate policy and money without either being subordinate to the other in every respect (related to the international-relations sense of intergovernmentalism, which treats states as the primary actors in a wider system, though here the 'states' are the tiers within one country). Cooperative federalism, sometimes called 'marble-cake' federalism, describes the pattern in which national and subnational governments jointly design and fund programmes, blending their responsibilities, rather than each occupying a strictly separate 'layer-cake' domain of exclusive authority (see cooperative federalism). Most functioning federations and devolved unitary states operate closer to the marble-cake pattern in practice, whatever their constitution formally describes, because few real public problems — health, housing, climate adaptation — sit inside one level's exclusive competence. The wider concept that names this whole terrain, spanning formal government tiers and the networks of non-governmental and international actors that increasingly act alongside them, is multi-level governance, the term political scientists use for the vertical and horizontal spread of authority across governmental and non-governmental bodies together (see multi-level governance).

Best practices

1. Assign a function to a level of government with the money to match, not the money attached later. A responsibility handed down without a matching revenue source or transfer becomes an unfunded mandate, and the level that inherited it will either under-deliver or divert funds from something else the same residents also need.
2. Publish the equalization or transfer formula, and the data that feeds it, before applying it. A formula that is calculated but not published invites the suspicion, often justified, that it was adjusted after the fact to produce a politically convenient result.
3. Separate unconditional equalization from conditional programme funding in the budget documents of every level involved. Blending the two makes it impossible for a legislature, council, or citizen to see how much of a region's revenue is genuinely discretionary and how much is earmarked before it arrives.
4. Write a subsidiarity test into the process for creating any new function or programme, not just into a constitutional preamble. Ask explicitly which level is best placed to deliver this, and require the answer to be defended, rather than defaulting to whichever level happens to have spare capacity or political appetite this year.
5. Build a standing intergovernmental forum before a crisis forces one into existence. A council or committee that already meets routinely, with established relationships and data-sharing habits, can move quickly when a genuine emergency arrives; one improvised during the emergency loses its first critical weeks to establishing basic trust and information flow.
6. Cost a mandate's compliance burden on the level that must deliver it before legislating the mandate. A national or regional government that estimates a standard's cost only for its own budget, and not for the subnational government that must actually implement it, will systematically underprice what it is asking for.
7. Give subnational governments a genuine channel to contest an assignment or a formula, not only a consultation. A formal dispute-resolution or renegotiation mechanism, used occasionally, is far less corrosive to trust than years of informal grievance with no route to a binding answer.
8. Match the tax instrument to the level best able to administer it, and accept the vertical fiscal imbalance that follows rather than pretending it away. Income and consumption taxes are usually more efficient collected nationally; pretending a local government can replace a national equalization transfer with local taxation of the same base usually just reproduces horizontal inequality at a smaller scale.
9. Report service outcomes by the level of government actually responsible, not only by the level that is politically visible. Citizens blame whichever government is in front of them for a failure that may originate in another level's funding or policy decision, and only transparent, level-attributed reporting lets that blame land where it belongs.
10. Review the functional assignment periodically, not only when a crisis exposes its failure. Demographic change, new technology, and shifting settlement patterns change which level is genuinely best placed for a function over time, and an assignment that made sense a generation ago can quietly stop fitting without anyone deciding to change it.
11. Design intergovernmental transfers to be predictable over a multi-year horizon, not renegotiated annually from scratch. A subnational government cannot plan capital investment or a multi-year workforce strategy against a transfer that might change size or condition every single budget cycle.

Questions to discuss with your team

Which of our organization's core functions genuinely depend on a decision, a transfer, or an approval from another level of government, and do we track that dependency explicitly? Many organizations discover this dependency only when a delay elsewhere stalls a programme they had otherwise readied for delivery. Use this question to map, function by function, where the actual decision rights and money sit, not where your organization's own remit formally begins and ends. Discuss which of those dependencies has caused a delay or a public complaint in the last two years, and whether anyone owns the relationship with the level of government on the other side of it. If no one does, that is itself the finding.

If our funding formula or transfer arrangement changed unfavourably next year, how much of our current service level could we sustain, and for how long? Subnational and devolved bodies in particular can build years of service commitments on a transfer they do not control and cannot easily forecast. Use this question to test how exposed your current budget is to a plausible change in the formula, the underlying data, or the political mood behind it. Discuss what reserve, contingency, or diversification would meaningfully reduce that exposure, and whether building one is realistic given your current fiscal position.

Where a function is formally shared between levels, is it clear to a resident, and to us, who is actually accountable for the outcome? Cooperative or 'marble-cake' arrangements deliver real coordination benefits but can also let each level quietly point at the other when something goes wrong. Use this question to pick one genuinely shared function — housing, public health, emergency response are common examples — and trace what happens, in practice, when it fails. Discuss whether a resident could name who is accountable, and if the honest answer is no, discuss what a clearer division of accountability, even within a shared delivery model, would look like.

Has a mandate been placed on us, or by us on another level, without the money to match it, and what did that actually cost the level that received it? Unfunded mandates are easy to create and hard to notice from the level that created them, because the fiscal pain lands somewhere else. Use this question to identify at least one live example in either direction — a requirement your organization must meet without full funding, or one it has imposed on a level below it. Discuss what it would take to either fund the mandate properly or formally relax the requirement, and why neither has happened yet.

Do we have a standing relationship with the levels of government above and below us, or only an ad hoc one that activates during a crisis or a funding negotiation? A relationship built only under pressure starts from a position of mutual suspicion at exactly the moment trust is most needed. Use this question to inventory what standing forums, committees, or regular contacts actually exist between your organization and the adjacent levels of government it depends on. Discuss whether those forums have real decision authority or are purely consultative, and what one concrete step would make the relationship more resilient before the next crisis, not during it.

Where subsidiarity would suggest a different level should hold a function we currently hold, or vice versa, what is stopping the reassignment? Functional assignments often persist well past the point they made sense, because reassignment threatens someone's budget, headcount, or political visibility even when the case for change is sound. Use this question to name, honestly, one function currently held at the 'wrong' level by a subsidiarity test, in either direction. Discuss what would need to be true — politically, fiscally, administratively — for that reassignment to actually happen, and whether it is worth pursuing given those obstacles.

In practice: a public value example

A landlocked, mid-sized federation — fictional, illustrative of a recurring pattern rather than a report on any real country — faced a recurring wildfire season that had grown longer and more destructive over a decade, straining a disaster-response system split, as in most federations, across three levels: a national government controlling the largest firefighting aircraft and emergency-declaration powers, regional state governments owning most forestry land and running the professional fire services, and local municipalities responsible for evacuation orders and shelters within their own boundaries. Each level had its own budget, its own elected leadership, and, in a bad year, its own incentive to be seen acting decisively rather than waiting for another level to move first.

The previous fire season had exposed the cost of that fragmentation starkly: a state government had requested national air support two days before a fire crossed into a populated area, but the request sat in an informal channel with no standing protocol, and the aircraft arrived only after evacuation had already begun under municipal authority alone, with shelters that the state's grant-in-aid for emergency preparedness had funded for a smaller, historical average fire season rather than the scale the region was now experiencing. A subsequent inquiry found no single level of government had failed on its own terms; each had operated within its own competent authority under the existing subsidiarity assumptions. The coordination itself had failed, because no standing forum existed to reconcile a national asset, a regional fire service, and a municipal evacuation order in the hours that actually mattered.

Ahead of the next season, the three levels negotiated a standing intergovernmental fire-response compact, meeting quarterly year-round rather than only when a fire was already burning, with a pre-agreed trigger for national air-support requests that removed the informal, ad hoc negotiation from the critical early hours of an emergency. The compact also revised the state's emergency-preparedness grant formula to index shelter capacity to a rolling five-year average fire severity rather than a fixed historical baseline, funded jointly by a national top-up and a state contribution, so the mismatch between funded capacity and actual risk would not simply recur as the climate continued to shift.

When the next severe fire season arrived, the pre-agreed trigger released national air support a full day earlier than the previous year's informal request had, and municipal shelters, sized to the revised formula, held capacity through the worst week without the overflow the prior year had produced. The national government's after-action report credited the standing compact, not any single level's individual competence, for the improved outcome — the same three levels of government, with the same formal powers as before, coordinating through a structure built before the crisis rather than improvised during it.

Four sector lenses

Local government

Local government sits at the sharp end of most intergovernmental arrangements: it delivers many of the services citizens interact with daily, yet frequently controls only a small share of the revenue those services require, making it structurally dependent on transfers, grants, or a shared tax base it does not set the rate for. A local authority's negotiating leverage is usually weaker than a regional or national government's, so the practical discipline for local leaders is less about designing the intergovernmental system and more about documenting, precisely and publicly, where a mandate or a service standard has arrived without matching funding, so the case for a better settlement is available when the opportunity to renegotiate arises.

National government

National government usually holds the constitutional or statutory power to design the overall assignment of functions and the equalization or transfer formulas that fund it, which makes it the level most able to fix a structural imbalance and the level most tempted to leave one in place, because a vertical fiscal imbalance that keeps subnational governments dependent also keeps them politically compliant. The distinctive discipline at this level is resisting the temptation to use conditional grants as a substitute for genuine devolved authority — announcing decentralization while retaining, through earmarking and reporting conditions, most of the actual decision rights a devolved function was supposed to transfer.

Social sector and nonprofit

Nonprofits and non-governmental organizations rarely hold constitutional standing in an intergovernmental system, but they routinely deliver services commissioned by one level of government while operating under regulatory or licensing regimes set by another, and a change in either level's policy can disrupt delivery without either government treating the disruption as its own responsibility. The distinctive discipline here is tracking which level of government actually controls each lever affecting a programme — funding, regulation, licensing, planning permission — because an advocacy or escalation effort aimed at the wrong level, however well argued, will not move the outcome, a risk distinct from the funding-model fragmentation Topic 3.8 — Social Sector and Nonprofit Management examines from the organization's own revenue side (see Topic 3.8 — Social Sector and Nonprofit Management).

Multilateral and international

Multilateral and international bodies add a further tier above the national government, one in which member states retain formal sovereignty yet have pooled specified decision rights, making subsidiarity an explicit, contested design question rather than a background assumption — the European Union's treaty-based use of the principle to decide when the Union, rather than a member state, should act is the clearest working example of this at supranational scale. Because a multilateral body cannot compel a national government the way a national government can compel a subnational one, its equivalent of an intergovernmental transfer is usually conditional development finance or technical assistance, and its equivalent of an unfunded mandate is a treaty obligation or standard a member state commits to without receiving the financing to implement it in full.

Common failure modes

The unfunded mandate. A higher level of government legislates a standard or a service obligation for a lower level without transferring revenue sufficient to cover it, often because the higher level gets the political credit for the standard while the lower level absorbs the fiscal and delivery cost. The cost is either a quietly under-delivered standard, a service cut elsewhere in the lower level's budget to cross-subsidize the mandate, or a slow accumulation of local debt that eventually becomes a crisis nobody at the national level anticipated because it was never their balance sheet.

Blame-shifting across a shared function. When a function is delivered jointly or divided unclearly between levels, each government has an incentive, in a visible failure, to attribute the cause to the other level's decision or funding rather than its own, and a citizen experiencing the failure has no way to adjudicate the claim. The cost compounds over time as public trust erodes in government generally, not in any one level specifically, because the seams between levels are invisible to the person the failure actually affects.

A formula frozen past its relevance. An equalization or transfer formula, once negotiated, tends to become politically difficult to revisit, because any change creates winners and losers among subnational governments who will resist a change that reduces their allocation even if the formula no longer reflects current costs or capacities. The cost is a growing gap between the formula's assumptions and reality, visible for years before anyone has the political will to renegotiate it, by which point the regions it under-serves have often fallen further behind than a timely correction would have allowed.

Recentralization disguised as coordination. A national or regional government facing a crisis, or simply seeking more control, can use a genuine coordination need as the justification for withdrawing devolved authority or replacing a block grant with tightly conditional funding, presenting a subsidiarity reversal as an efficiency improvement. The cost is a loss of the local responsiveness the original devolution was designed to capture, often without the promised efficiency gain actually materializing, since the lower level's local knowledge does not transfer upward along with the decision right.

Coordination invented only after the crisis. Standing intergovernmental forums are administratively unglamorous and easy to defund or let lapse in calm periods, so many systems have no functioning coordination mechanism until an emergency forces one into existence under time pressure. The cost is paid in exactly the hours when coordination matters most, as the worked example above illustrates, because informal, improvised coordination between levels that do not normally work together is measurably slower than a standing relationship with pre-agreed triggers and protocols.

Maturity model

Checklist

• Map every core function your organization delivers against the level of government that actually funds or approves it.
• Confirm whether any current mandate you operate under, or impose on another level, is unfunded, and by how much.
• Locate the published formula, if one exists, behind any transfer or equalization payment your organization receives or grants.
• Identify the standing intergovernmental forum, if any, relevant to your organization's core dependencies, and confirm it has real decision authority.
• Test your current budget's exposure to a plausible unfavourable change in a transfer formula or funding condition.
• Apply a subsidiarity test to at least one function currently held at a level that may no longer be the best fit.
• Confirm that public reporting on any jointly delivered function clearly attributes responsibility by level.
• Establish or renew a channel through which a lower level can formally contest an assignment or a formula.
• Review whether a conditional grant your organization administers could instead be a block grant without losing legitimate oversight.
• Build or refresh a pre-agreed trigger protocol for the intergovernmental coordination most likely to be needed in the next crisis.

Key sources

• OECD, Network on Fiscal Relations across Levels of Government (the 'fiscal federalism network') — comparative policy analysis, the OECD Fiscal Decentralisation Database, and the OECD Fiscal Federalism Studies series on intergovernmental fiscal relations among OECD member states.
• World Bank, Decentralization and Intergovernmental Relations Global Solutions Group — cross-country knowledge and operational guidance on decentralization, multi-level governance, and intergovernmental fiscal transfers.
• International Monetary Fund, Designing Sound Fiscal Relations Across Government Levels in Decentralized Countries — IMF working paper on the design of intergovernmental fiscal frameworks, transfers, and subnational borrowing rules.
• International Monetary Fund, Fiscal Federalism in Theory and Practice — reference volume on the theory and international practice of assigning expenditure and revenue functions across levels of government.
• Wallace E. Oates, Fiscal Federalism — the foundational economic statement of the normative case for assigning stabilization and redistribution to central government and allocation to subnational government.

References

1. Federalism — Wikipedia — https://en.wikipedia.org/wiki/Federalism
2. Unitary state — Wikipedia — https://en.wikipedia.org/wiki/Unitary_state
3. Confederation — Wikipedia — https://en.wikipedia.org/wiki/Confederation
4. Devolution — Wikipedia — https://en.wikipedia.org/wiki/Devolution
5. Home rule — Wikipedia — https://en.wikipedia.org/wiki/Home_rule
6. Subsidiarity — Wikipedia — https://en.wikipedia.org/wiki/Subsidiarity
7. Fiscal federalism — Wikipedia — https://en.wikipedia.org/wiki/Fiscal_federalism
8. Equalization payments — Wikipedia — https://en.wikipedia.org/wiki/Equalization_payments
9. Grant-in-aid — Wikipedia — https://en.wikipedia.org/wiki/Grant-in-aid
10. Intergovernmentalism — Wikipedia — https://en.wikipedia.org/wiki/Intergovernmentalism
11. Cooperative federalism — Wikipedia — https://en.wikipedia.org/wiki/Cooperative_federalism
12. Multi-level governance — Wikipedia — https://en.wikipedia.org/wiki/Multi-level_governance
13. Network on Fiscal Relations across Levels of Government — OECD — https://www.oecd.org/en/topics/sub-issues/fiscal-federalism-network.html
14. Decentralization and Intergovernmental Relations Global Solutions Group — World Bank — https://www.worldbank.org/en/topic/governance/brief/decentralization-and-intergovernmental-relations-global-solutions-groups
15. Designing Sound Fiscal Relations Across Government Levels in Decentralized Countries — International Monetary Fund — https://www.imf.org/en/publications/wp/issues/2018/12/10/designing-sound-fiscal-relations-across-government-levels-in-decentralized-countries-46425
16. Fiscal Federalism in Theory and Practice — International Monetary Fund — https://www.imf.org/en/publications/books/issues/2016/12/30/fiscal-federalism-in-theory-and-practice-2310