In discussions on fiscal decentralization, conditional grants are often treated as a technical detail rather than a central feature of multilevel governance. Much of the debate focuses on revenue assignments, own-source taxation, or unconditional transfers, while conditional grants are dismissed as inherently centralizing. Yet in practice, conditional grants are one of the most widely used instruments for financing decentralized service delivery, especially in sectors such as education and healthcare.
A comparative study by Johanna Schnabel and Paolo Dardanelli (2023) published in the journal Governance challenges many of the assumptions that surround conditional grants by asking a simple but underexplored question: do conditional grants actually undermine subnational autonomy, or do they primarily strengthen local capacity?
Examining major grant programs in three federal countries (Australia, Canada, and the United States), the authors move beyond ideology to assess how conditional grants function in real political and fiscal systems. Their key finding: conditional grants generally strengthen subnational capacity more than they undermine autonomy, but their benefits are uneven—often favoring smaller and fiscally weaker jurisdictions while imposing the greatest autonomy costs on more politically or culturally distinctive ones.
Capacity versus autonomy: a trade-off, not a zero-sum game
The paper reframes the debate on conditional grants by conceptualizing the impact of conditional grants as a balance between two forces. On the one hand, conditional grants increase the financial capacity of states and provinces by providing resources they could not easily raise themselves. On the other hand, the policy conditions attached to these funds may constrain local autonomy.
Rather than assuming that conditionality automatically leads to centralization, the authors measure impact as the difference between gains in capacity and losses of autonomy from the perspective of subnational governments themselves. Their findings are striking: across all three federations and both policy sectors, conditional grants generally deliver a positive net impact. Capacity gains are typically large, while autonomy losses are often modest and, in many cases, politically acceptable.
This suggests that the common framing of conditional grants as an “offer that cannot be refused” oversimplifies reality. Conditions are frequently negotiated, and subnational governments often welcome conditional grants when national objectives align reasonably well with their own policy preferences.
Who benefits—and who pays the autonomy cost
While conditional grants are broadly beneficial, their effects are uneven. The study shows that smaller and fiscally weaker states and provinces tend to benefit the most. For these jurisdictions, federal funding meaningfully expands service delivery capacity, and the attached conditions are often a price worth paying.
By contrast, larger, wealthier, and more politically or culturally distinctive units tend to experience greater autonomy losses. Provinces such as Quebec, or states with strong regional identities, are more likely to resist federal conditions and to perceive them as intrusive. Importantly, these highly distinctive units are not necessarily more successful in negotiating exemptions or concessions, meaning they often bear a disproportionate share of the autonomy costs associated with conditional grants.
This finding helps explain why conditional grants can feel consensual in much of a federation while simultaneously generating intense resistance in specific regions. Centralization, where it occurs, is not uniform—it is selective and politically consequential.
Lessons for decentralization and multilevel governance
For decentralization practitioners and reformers, the study provides important insights. Conditional grants are not inherently anti-decentralization tools. When designed well, they help address vertical fiscal imbalances and promote territorial equity without fundamentally undermining local self-government. However, poor design—especially rigid or insensitive conditionality—can exacerbate center-periphery tensions and erode trust.
The study also highlights that conditional grants tend to become less contentious over time. Once programs are established, learning effects, institutional adaptation, and negotiated adjustments often reduce conflict. This suggests that the long-term governance effects of conditional grants may be more positive than the political battles that accompany their introduction.
As decentralization debates increasingly focus on outcomes rather than institutional purity, conditional grants deserve far more attention than they currently receive. They are not a peripheral financing mechanism; they are a core instrument through which multilevel governance systems reconcile autonomy, equity, and service delivery in practice.
Read the full (open-access) article:
Johanna Schnabel and Paolo Dardanelli. 2023. Helping hand or centralizing tool? The politics of conditional grants in Australia, Canada, and the United States. Governance (Volume 36, Issue 3, Pages 865-885): July 2023.
https://doi.org/10.1111/gove.12708
Note: The feature image for this blog post was generated with the help of AI.
