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A fiscal needs approach to equalization transfers in a decentralized federation, Volume 1
Author:Shah, Anwar; DEC; Country:Central African Republic;
Date Stored:1994/04/01Document Date:1994/04/30
Document Type:Policy Research Working PaperSubTopics:Environmental Economics & Policies; Banks & Banking Reform; National Governance; Municipal Financial Management; Public Sector Economics
Language:EnglishMajor Sector:Public Administration, Law, and Justice
Region:AfricaReport Number:WPS1289
Sub Sectors:Other Public Sector ManagementCollection Title:Policy, Research working paper ; no. WPS 1289
Volume No:1  

Summary: 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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