Equalization grants

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Equalization grants

• International Experience
• Indonesias Options
• Bert Hofman, World Bank
• with thanks to Jun Ma, Ehtisham Ahmad

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Equalization grants

• Importance of grants
• Rationale for grants
• Types of grants
• Equalization grants
• Examples of equalization grants
• Issues for Indonesia

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Importance of Grants
Percent of government spending financed by grants
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Importance of Grants
Percent of Government spending financed by grants
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Importance of Grants
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Rational for grants

• Vertical imbalance
• Horizontal imbalance
• Spill-overs
• National priorities
• Nation building

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Vertical Imbalance
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Types of grants

• General Grants
• Conditional/specific grants
• Matching and Non-matching Grants
• Open Ended and Closed-Ended Grants
• Block grants
• Equalization grants

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Issues in equalization grants design

• Should one equalize?
• What to equalize
• Expenditure needs
• Fiscal capacity
• Source of fund
• Minimum standards
• Capital spending
• Equalizing grant and other grants

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Equalization

• Operational definition
• enable similar levels of service delivery at
  similar levels of taxation
• Principle
• Equalization GrantExpenditure Needs- Fiscal
  Capacity
• Practice
• fiscal capacity only (Canada)
• fiscal capacity and some needs (Germany)
• fiscal capacity and elaborate needs (Australia)

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Examples of Equalization

• Australia
• Germany
• Japan
• Korea
• China

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Australia

• Federal Country
• Large Vertical Imbalance
• Strongly Equalizing Grants System
• Revenue Capacity Tax Base Average National tax
  Rate
• Expenditure Needs
• 14 categories (Health, Education, etc.)
• 25 disability factors (factors that increase
  standard costs), composed of multiple indicators
• Special grants subtracted from grant entitlement
• Excellent administration by the Grants Commission

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Germany

• Federal country
• Substantial tax sharing
• VAT redistributed per capita--provides most of
  the equalization
• Fiscal Equalization through Finanzausgleich
  (Financial Settlement)
• Principle equalize needs-adjusted fiscal
  capacity
• Needs special burdens for city states
• Every state obtains at least 95 percent of
  average revenues
• Rich states are taxed--discourages tax effort
• Tax capacity over 110 percent of average tax with
  80 percent
• Eastern, poor states receive additional grants
  from central government

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Japan

• Unitary country
• Large vertical imbalance
• Equalization through Local Allocation Tax--both
  provinces and municipalities
• Considers fiscal capacity and needs
• Needs based on functions assigned to government

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Japan Cont.

• Basic need modification coefficient unit cost
• modification coefficients examples
• school types
• size of region
• population density in region
• cold area
• urbanization of region
• MOF Administers

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Korea

• Unitary country
• Similar to Japans system
• Fiscal capacity and needs
• Fiscal scarcity standard need - standard
  revenue
• Needs standard fiscal need supplemental need
• 29 standard factors
• Separate education transfer
• Ministry of Home Affairs Administers

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China

• See Mr. Zhangs speech

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Overview of Equalization around the World
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Indonesia Law 25/99

• Natural resource sharing
• oil gas
• other
• 25 percent of domestic revenues for general grant
• Distribution according to
• the regions needs
• the regions economic potential

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Resource sharing
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Resource Sharing
De-equalizing
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Impact of Law 25/99
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Issues in Indonesias Equalization Grants Design

• Defining Expenditure Needs
• Determine expenditure assignments
• Defining Revenue Capacity
• Local tax base expansion?
• How Much Equalization
• Data Requirements
• Consultation Discussion
• Grants Administration
• Transition Arrangements

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Goal

• Not
• Make every region happy
• But
• Make Every Region Reasonably Unhappy