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Fiscal Federalism 2014

Making Decentralisation Work

image of Fiscal Federalism 2014

This book offers an overview on recent trends and policies in intergovernmental fiscal relations and sub-central government. Accessible chapters provide: insight into how sub-central governments are managing ongoing consolidation, as well as how fiscal decentralisation fosters economic growth and educational attainment; a balanced account of the virtues and limits of tax competition between jurisdictions; an overview of fiscal equalisation policy; and some fascinating background information about past tax and public service reforms.

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Fiscal equalisation: A key to decentralised public finances

Fiscal equalisation is a transfer mechanism that allows different jurisdictions to provide their citizens with similar public services at similar tax rates despite differences in economic wealth. Across OECD countries, equalisation has a strong redistributive effect: on average it reduces pre-equalisation disparities by more than two-thirds and, in some countries, to virtually nil. After equalisation, tax and public service levels are much more evenly distributed across a country than GDP or household income. Strong equalisation comes at a cost. Strong equalisation may undermine local and regional development efforts or may prevent firms and households from migrating towards more productive jurisdictions. Equalisation systems also tend to be pro-cyclical and exacerbate asymmetric shocks to a jurisdiction. Moreover, large equalisation systems can undermine fiscal discipline at the sub-central level. Equalisation arrangements should rely on revenue and needs indicators that cannot be manipulated by sub-central jurisdictions, and they should be transparent about donors and recipients.

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