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A fiscal needs approach to equalization transfers in a decentralized federation

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  • Shah, Anwar
  • DEC

Abstract

The author reviews the conceptual basis for fiscal equalization transfers, analyzes the theoretical implications for optimal design of equalization transfers, and suggests quantitative approaches for assessing the fiscal needs of subnational governments and determining their entitlement to transfers. The author illustrates proposed methods using data for local and provincial Canadian governments. The proposed methods could be useful tools, he says, for undertaking systematic objective reviews of aggregate and sectoral public spending in developing countries. The author argues that in a decentralized federation, fiscal inefficiencies and inequities arise because of subnational governments'differing levels of ability to provide comparable public services at comparable tax rates. Fiscal equalization transfers that reduce or eliminate differentials in net fiscal benefits create a rare instance in economics when considerations of equity and efficiency coincide. These transfers must allow for differences in the spending needs and revenues-raising abilities of the various subnational governments. The author argues for a two-tiered approach to equalization. The first tier would be a federal responsibility to equalize the burden of federal taxes. The second tier would be an interprovincial equalization fund to be administered by the Council of Provincial Finance Ministers. It would entail a comprehensive equalization system that takes into account provincial spending needs. The standard of equalization would be negotiated.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1289.

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Date of creation: 30 Apr 1994
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Handle: RePEc:wbk:wbrwps:1289

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Keywords: Public Sector Economics&Finance; Banks&Banking Reform; Municipal Financial Management; National Governance; Environmental Economics&Policies;

References

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  1. Anwar M. Chaudry-Shah, 1989. "A Capitalization Approach to Fiscal Incidence at the Local Level," Land Economics, University of Wisconsin Press, vol. 65(4), pages 359-375.
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Cited by:
  1. World Bank, 2007. "China : Improving Rural Public Finance for the Harmonious Society," World Bank Other Operational Studies 7664, The World Bank.
  2. Jun Ma, 1997. "Intergovernmental fiscal transfer in nine countries : lessons for developingcountries," Policy Research Working Paper Series 1822, The World Bank.
  3. Francois Vaillancourt & Richard M.Bird, 2004. "Expenditure-Based Equalization Transfers," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0410, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Peter Friedrich & Anita Kaltsch├╝tz & Chang Woon Nam, 2004. "Recent Development of Municipal Finance in Selected European Countries," ERSA conference papers ersa04p288, European Regional Science Association.
  5. Peter Friedrich & Anita Kaltschuetz & Chang Woon Nam, 2004. "Significance and Determination of Fees for Municipal Finance," CESifo Working Paper Series 1357, CESifo Group Munich.
  6. Chang Woon Nam & R├╝diger Parsche, 2001. "Municipal Finance in Poland, the Slovak Republic, the Czech Republic and Hungary: Institutional Framework and Recent Development," CESifo Working Paper Series 447, CESifo Group Munich.

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