15th Annual Meeting of the Network on Fiscal Relations Across Levels of Government, OECD, 2-3 December 2019

1. Comparing Fiscal
Equalisation Systems:
A first look at the 2019 data
Sean M. Dougherty
Senior Advisor and Head of Secretariat
OECD Network on Fiscal Relations
15th Annual Meeting of the OECD
Network on Fiscal Relations
2 December 2019 (Paris)

2. Background
• Our current fiscal equalisation project
builds on previous work
2
Fiscal equalisation
questionnaire 2006
Blöchliger and Charbit (2008),
“Fiscal equalisation”
2012
questionnaire
update
OECD (2013), “Fiscal equalisation:
A key to decentralised public
finances”, in Fiscal Federalism 2014
Fiscal equalisation
questionnaire 2019
Fiscal Federalism
2020

3. Highlights of past work
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Key challenges identified:
• Revenue equalisation may reduce tax effort and slow
convergence
• Cost equalisation may be prone to rent seeking.
• Equalisation can pose a problem for budget stability.
Main policy messages:
• Use core, difficult to manipulate measures to determine
equalising transfers
• Representative Tax Systems (RTS) can mitigate perverse
incentives
• Separate equalising transfers from other transfers
• Monitor impacts on inequality and other economic
outcomes

4. Preliminary findings: Impacts
4
0%
2%
4%
6%
8%
10%
12%
Equalising transfers as a percentage of total
government expenditure, selected countries

5. Preliminary findings: Modalities
• There are three primary modalities of fiscal equalisation:
– Revenue equalising: Equalises the fiscal capacities
or (standardised) per capita revenues of SCGs
– Cost equalising: Equalises the (standardised) per
capita costs faced by SGCs
– Capacity-expense matching: A single transfer fills
the gap between (standardised) costs and
(standardised) revenues of SCGs
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6. • On average, across revenue equalising systems*, we
observe that:
– Inter-jurisdictional Gini coefficient of per capita
revenue declines by about 4 percentage points after
equalisation
– This corresponds to roughly a one-third drop in inter-
jurisdictional revenue disparities
– Some countries aim for complete equalisation of fiscal
capacity, while others set explicit limits on the extent
of equalisation
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Preliminary findings: Impacts
*Based on responses received.

7. Preliminary findings: Revenue equalisation
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0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
Canada Germany
Ginicoefficient
Before equalisation After equalisation

8. Preliminary findings: Cost equalisation
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0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
Mexico Italy
Ginicoefficient
Before equalisation After equalisation

9. Preliminary findings: Policy responses
• A few key mechanism design approaches have
been identified to help equalisation policy be
more neutral from the perspective of the SCG:
– Use of a representative tax system (e.g. Canada,
Australia, Germany)
– Use of standardized costs (e.g. Japan, Korea)
– Arms-length commissions (e.g. India, Australia)
– Incomplete equalisation (e.g. Germany, Lithuania,
Estonia)
– Separating equalising transfers from other transfers
(e.g. Canada)
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