Equalization payments

Equalization payments are cash payments made in some federal systems of government from the federal government to subnational governments with the objective of offsetting differences in available revenue or in the cost of providing services. Many federations use fiscal equalisation to reduce the inequalities in the fiscal capacities of sub-national governments arising from the differences in their geography, demography, natural endowments and economies. However the level of equalisation sought varies.

The payments are generally calculated based on the magnitude of the subnational "fiscal gap": essentially the difference between fiscal need and fiscal capacity. Fiscal capacity and fiscal need are not equivalent to measures of fiscal revenue and expenditure, as making them so would induce perverse incentives to subnational governments to reduce fiscal effort.

Australia introduced a formal system of horizontal fiscal equalisation (HFE) in 1933 to compensate states/territories which have a lower capacity to raise revenue. The objective is full equalisation which means that, after HFE, each of the six states, the Australian Capital Territory and the Northern Territory would have the capacity to provide services and the associated infrastructure at the same standard, if each state/territory made the same effort to raise revenue from its own sources and operated at the same level of efficiency.

Currently the funds distributed to achieve HFE are the revenues raised from the Goods and Services Tax (GST), currently about AUD 50 bn a year. The distribution of GST required to achieve HFE is decided by the Federal Treasurer each year, on the basis of advice provided by the Commonwealth Grants Commission (CGC).

Achieving HFE does not mean that the states are directed how to raise revenue or how to spend their funds. GST revenue grants from the Commonwealth are unencumbered and available for any purpose. Accordingly, HFE equalises fiscal capacity, not fiscal policies which remain for the states to decide for themselves. It does not result in the same level of services or taxes in all states, direct that the states must achieve any specified level of service in any area, nor impose actual budget outcomes in accordance with the Commission's calculations.

The only mechanism designed to reduce fiscal disparities between the federated entities in Belgium is a program called the National Solidarity Intervention (Dutch: Nationale Solidariteitsbijdrage (NSB); French: Intervention de solidarité nationale (ISN)). Under the program, those Regions in which the average per capita yield of personal income tax falls below the national average are entitled to an unconditional transfer from the federal government.

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