1. Fiscal equalisation in a cross-country perspective: policy issues Hansjörg Blöchliger Head, OECD Fiscal Federalism Network Berlin, 27 June 2014 1

2. Fiscal equalisation 2 Most countries have explicit or implicit equalisation schemes The overarching objective of equalisation is inter-regional redistribution Policy issue: ensure that redistribution is reached with a minimum of side effects

3. Equalisation effect 3 Country Gini coefficient Ratio of highest to lowest tax-raising capacity Before equalisation After equalisation Before equalisation After equalisation 20052012200520122005201220052012 Federal/regional countries Australia 0.050.070.00 4.87.51.01 Austria 0.020.05 1.11.5 Canada 0.100.110.070.082.4 1.71.8 China 0.330.310.250.1814.410.39.55.3 Germany 0.06 0.02 1.7 1.21.1 Italy 0.210.190.100.046.14.51.3 Spain 0.150.130.040.052.13.01.4 Switzerland 0.150.170.11 3.84.32.52.6 Unitary countries Chile (2010) 0.49 0.14 20.6 2.3 Denmark 0.080.060.040.032.21.42.01.2 Finland 0.110.120.030.051.8 1.11.4 Japan 0.20 3.2 Norway 0.13 0.050.042.22.11.31.2 Portugal 0.34 0.14 12.7 2.1 Sweden 0.060.070.01 1.41.51.1 Turkey 0.22 0.06 65.0 1.7 Average 0.16 0.070.068.85.12.11.8

4. Issue 1: Vertical versus horizontal equalisation 4 Gap-filling versus Robin-Hood principle Vertical equalisation requires more resources for similar equalisation objective and may trigger wrong incentives Horizontal equalisation could be more conducive for fiscal sustainability; however depends on wider fiscal framework

5. Issue 2: Revenue- versus cost equalisation 5 Revenue equalisation equalises revenue (tax raising) capacity, cost equalisation equalises public service cost “Core” equalisation is often revenue- based, but most federal countries apply combinations Differences in tax raising capacity are 4 to 6 times larger than cost differences

6. Revenue and cost equalisation in OECD countries 6

7. Issue 3: Getting the equalisation basis right 7 Trade-off between redistribution and efficiency/sustainability objective, to be minimised Revenue equalisation: ensure that states keep “development dividend”, particularly poorer jurisdictions Cost equalisation: avoid spending drift at the sub-federal level and excessive complexity

8. Issue 4: Other indicators to assess equalisation base? 8 Weighting for (larger) population and living cost in a jurisdiction could ensure more targeted equalisation Weighting for smallness may slow down adaptations in public service delivery and hamper territorial reform

9. Issue 5: Equalisation and stabilisation 9 Equalisation and stabilisation tend to be mutually exclusive Horizontal equalisation less prone to destabilising effect. In vertical systems, use of lagged variables could help In general, equalisation and stabilisation are two separate policy objectives to be addressed by two distinct transfer systems