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Fiscal equalisation

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  • Hansjörg Blöchliger
  • Claire Charbit

Abstract

By Hansjörg Blöchliger and Claire Charbit Fiscal equalisation is a transfer of fiscal resources across jurisdictions to offset disparities in revenue raising capacity or public service cost. It covers on average 2.5% of GDP or 5% of total government expenditure across OECD countries. Equalisation reduces fiscal disparities by two-thirds on average and in some countries levels them virtually out. Strong equalisation comes at a price: on average, around 70% of a jurisdiction’s additional tax income must be dedicated to an equalisation fund. The equalisation rate is generally higher for jurisdictions with low fiscal capacity, reducing their tax effort and likely to slow down regional economic convergence. Cost equalisation is larger than revenue equalisation in terms of GDP despite smaller cost disparities, pointing at inefficiencies in the distribution formulae. Fiscal equalisation can be pro-cyclical but most countries succeed in reducing fluctuations of entitlements, sometimes at the cost of sub-central budget needs. Fiscal equalisation is very country specific, and data and analysis must be taken with care.

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File URL: http://dx.doi.org/10.1787/eco_studies-v2008-art8-en
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Bibliographic Info

Article provided by OECD Publishing in its journal OECD Journal: Economic Studies.

Volume (Year): 2008 (2008)
Issue (Month): 1 ()
Pages: 1-22

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Handle: RePEc:oec:ecokac:5kzbqwfvwtq7

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  1. Hansjörg Blöchliger & Olaf Merk & Claire Charbit & Lee Mizell, 2007. "Fiscal Equalisation in OECD Countries," OECD Working Papers on Fiscal Federalism 4, OECD Publishing.
  2. Robin Boadway & Masayoshi Hayashi, 2002. "An Evaluation of the Risk-Sharing Function of Equalization in Canada," Working Papers 1006, Queen's University, Department of Economics.
  3. Martin Scheider, 2002. "Local fiscal equalisation based on fiscal capacity: the case of Austria," Fiscal Studies, Institute for Fiscal Studies, vol. 23(1), pages 105-133, March.
  4. Daniel Bergvall & Claire Charbit & Dirk-Jan Kraan & Olaf Merk, 2005. "Intergovernmental Transfers and Decentralised Public Spending," OECD Journal on Budgeting, OECD Publishing, vol. 5(4), pages 111-158.
  5. Robin Boadway & Masayoshi Hayashi, 2004. "An Evaluation of the Stabilization Properties of Equalization in Canada," Canadian Public Policy, University of Toronto Press, vol. 30(1), pages 91-109, March.
  6. Johansson, Eva, 2003. "Intergovernmental grants as a tactical instrument: empirical evidence from Swedish municipalities," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 883-915, May.
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  9. Stuti Khemani, 2004. "The Political Economy of Equalization Transfers," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0413, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  10. Eckhard Wurzel, 2003. "Consolidating Germany's Finances: Issues in Public Sector Spending Reform," OECD Economics Department Working Papers 366, OECD Publishing.
  11. Philip J. Grossman, 1987. "A Political Theory of Inter-Governmental Grants," School of Economics Working Papers 1987-06, University of Adelaide, School of Economics.
  12. Thomas Laubach, 2005. "Fiscal Relations Across Levels of Government in the United States," OECD Economics Department Working Papers 462, OECD Publishing.
  13. Shah, Anwar, 2005. "A framework for evaluating alternate institutional arrangements for fiscal equalization transfers," Policy Research Working Paper Series 3785, The World Bank.
  14. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
  15. William N. Evans & Sheila E. Murray & Robert M. Schwab, 1997. "Schoolhouses, courthouses, and statehouses after Serrano," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 16(1), pages 10-31.
  16. Ross Garnaut & Vince FitzGerald, 2002. "Issues in Commonwealth-State Funding," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 35(3), pages 290-300.
  17. Bev Dahlby & Neil Warren, 2003. "Fiscal Incentive Effects of the Australian Equalisation System," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 434-445, December.
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