1 Fiscal Flows , Fiscal Balance , and Fiscal Sustainability Richard

The search for “fiscal indicators” to provide a short-hand (and preferably quantitative) picture of the size, direction, and nature of intergovernmental finance – and, ideally, some guidance for policy designed to improve outcomes – appears to be neverending. “Fiscal balance” and “fiscal sustainability” are, for example, terms commonly heard in discussions of intergovernmental fiscal relations. These concepts sound like good things, and often policies are suggested that are intended to achieve them. “Fiscal flows” are perhaps less prominent in policy discussions, but this notion too is often very much in the minds of some of those engaged in such discussions. Indeed, in practice much of the discussion of both fiscal balance and fiscal sustainability often reduces to assertions about the present and projected future course of fiscal flows. The aim of this paper is to provide an overview of the uses and limits of these three approaches to measuring and interpreting the problems and progress of fiscal decentralization.