Fiscal equalisation

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.

Yardstick competition and fiscal disparities: An experimental study

“…In fact, the primary objective of fiscal equalisation is horizontal equity among the residents of different jurisdictions. Furthermore, fiscal equalization may also correct for inefficiencies that might arise if households or firms choose their location basing on net fiscal benefit and may help support macroeconomic stabilization and insure local jurisdictions against asymmetric shocks they may not be able to cope with if left alone (Blöchliger and Charbit, 2008).…”

Transferencias intergubernamentales y disparidades fiscales entre los estados en México 

“…Sin embargo, los esquemas que buscan igualar los ingresos disponibles reducen los esfuerzos para mejorar la capacidad de generación de ingresos, especialmente en las regiones menos desarrolladas, reduciendo la velocidad de convergencia. Para ello, Blöchliger y Charbit (2008) proponen establecer estándares generales que permitan determinar la capacidad fiscal efectiva 4 de los gobiernos subnacionales y así reducir los incentivos negativos recién mencionados. Asimismo, observan que algunos esquemas de transferencias ponen en riesgo la estabilidad fiscal de las entidades subnacionales al estar atados a indicadores históricos de forma que no reconocen ajustes contemporáneos exógenos que afecten las finanzas de los gobiernos subnacionales.…”

Raising Public Spending Efficiency in Switzerland

“…Fiscal equalisation in Switzerland is implemented via a transfer of fiscal resources across jurisdictions with the aim of offsetting differences in revenue-raising capacity and public service costs (Blöchliger and Charbit, 2008). In Switzerland, National Fiscal Equalisation exists between the Confederation and the cantons, but each canton also has its own equalisation system for its municipalities.…”