Expenditure-Based Equalization Transfers

This paper is divided into three main sections. In the first section, we set out briefly the standard theoretical case for both a general equalization transfer and for the incorporation of expenditure needs as a key factor in the design of such transfers and discuss how this case may be implemented. In the second section, we review how and to what extent expenditure factors are actually incorporated in a few selected equalization schemes around the world. Finally, in the last section we consider critically the relevance of assessing differentials in expenditure needs in determining equalization transfers. Our aim is to set forth in brief compass some general guidelines that may be useful to the many countries currently facing the need to establish sounder intergovernmental fiscal transfer systems in order to ensure that the outcome of decentralization is broadly economically and socially beneficial