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Evaluating fiscal equalisation: Finding the right balance

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  • Sean Dougherty
  • Kass Forman

Abstract

Fiscal equalisation refers to the transfer of financial resources to and between subnational governments with the aim of mitigating regional differences in fiscal capacity and expenditure needs. However, the determination of fiscal capacity and expenditure needs is not a straightforward task. OECD countries use widely varying mechanism design approaches in their equalisation systems. This paper compares national approaches, covering the three modes of fiscal equalisation: pure revenue equalisation, revenue/cost equalisation and gap-filling equalisation, describing the distinct impacts of each approach on subnational revenue disparities. A clear inverse relationship emerges between the size of the cost-equalising component within a system and the percentage change in subnational per capita revenue disparities after equalising transfers are applied, although no significant relationship emerges between equalisation and regional convergence.

Suggested Citation

  • Sean Dougherty & Kass Forman, 2021. "Evaluating fiscal equalisation: Finding the right balance," OECD Working Papers on Fiscal Federalism 36, OECD Publishing.
    • Handle: RePEc:oec:ctpaab:36-en
    DOI: 10.1787/253da2b8-en
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    Cited by:

    1. Ines Helm & Jan Stuhler, 2024. "The Dynamic Response of Municipal Budgets to Revenue Shocks," American Economic Journal: Applied Economics, American Economic Association, vol. 16(4), pages 484-527, October.
    2. Köppl-Turyna, Monika & Strohner, Ludwig, 2023. "Reformoptionen des österreichischen Finanzausgleichs," Policy Notes 52, EcoAustria – Institute for Economic Research.

    More about this item

    Keywords

    ; fiscal equalisation systems; fiscal federalism; inter-governmental transfers; public economics; regional inequality;
    All these keywords.

    JEL classification:

    • H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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