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Comparative Conclusions
on Fiscal Federalism
a n w a r s h a h
Fiscal federalism is concerned with the public finances of the various or-
ders of government in a federal system. Federal countries differ a great
deal in their choices – specifically, how the division of fiscal powers is al-
located among various orders and the associated fiscal arrangements.
Further, some aspects of fiscal arrangements, such as intergovernmental
fiscal transfers, resulting from these choices can be subject to periodic
review (e.g., the five-year sunset clause in Canada) and redefinition in
order to adapt to changing circumstances within and beyond nations.
Changes in these arrangements may also occur simply as a result of how
various constitutional provisions and laws are interpreted by courts
(as in Australia and the United States) or by various orders of govern-
ment, as in all federal countries. In recent years, these choices have
come under significant additional strain from the great changes arising
from the information revolution and the emergence of a “borderless”
world economy. This chapter reviews the practice of fiscal federalism in
twelve case study countries and highlights the findings and lessons from
these experiences.
Section 1 of this chapter provides a general discussion of the fiscal feder-
alism features of selected federations. This is followed by comparative re-
flections on the division of fiscal powers in section 2. The allocation of
spending and regulatory responsibilities is discussed, and attention is paid
to issues in revenue-raising responsibilities, including the financing of cap-
ital investments. Issues in macroeconomic management and economic co-
ordination are discussed in section 3. Section 4 highlights the practice of
intergovernmental fiscal transfers and pays special attention to transfers
whose purpose is to reduce regional fiscal disparities. A final section draws
some general conclusions from these experiences.
Comparative Conclusions 371
1 s a l i e n t f e a t u r e s o f s e l e c t e d f e d e r a t i o n s
The twelve federations (of these Spain and South Africa have unitary
constitutions but are considered quasi-federations in practice) reviewed
in this book represent a diverse sample in terms of demographics, level of
economic development, affinity with stylized models of federalism, and
features of fiscal federalism. In our sample, Switzerland is the smallest
and the second richest federation with a population of 8 million and a
per capita gdp of $37,465 (2002). India is the largest and poorest fed-
eration, with a population of 1.1 billion and a per capita gdp of $
(2004) (see table 1). The sample federations also present diverse models
of federalism. Australia, India, and Russia bear affinity to the layer-cake
model of dual federalism, with a strong national-government role in the
federal system. Under such a model, the responsibilities of the federal
and state governments are distinct and separate, and there is a hierarchi-
cal relationship among the various orders of government, with the fed-
eral government at the apex. In India, the federal government has the
residual powers and paramountcy on the shared rule, and it can even
change state boundaries. Both Spain and Malaysia can be characterized
as asymmetric layer-cake models of dual federalism. In Spain, Navarre
and the Basque country and, to a lesser extent, the states of Sabah and
Sarawak in Malaysia enjoy autonomous status and are treated more
equally than are other constituent units of the federation. Canada, Swit-
zerland, and the United States resemble the coordinate-authority model
of dual federalism. Under the coordinate-authority model of dual feder-
alism, states enjoy significant autonomy, and local governments are sim-
ply creatures of the states with a limited or no direct relationship with the
federal government. Germany and South Africa embody features of co-
operative federalism with interdependent (hierarchical) spheres of gov-
ernment, but in these countries the federal government assumes an
almost exclusive role in legislative authority for policy and standards, and
the intermediate order primarily acts as the implementing agent. Nigeria
has a three-tier hierarchical system with a strong federal government.
Brazil, by contrast, presents itself as a cooperative-federalism model with
three independent spheres of government. Brazil, India, Nigeria, and South
Africa have constitutionally recognized local governments, whereas in
all other federations local governments are creatures of the regional
(province/state) governments.
Countries with a federal form of government vary considerably in
terms of federal influence on state governments. Such influence is very
strong in Australia, Germany, India, Malaysia, Nigeria, Russia, Spain, and
South Africa; it is weak in Brazil, Canada, Switzerland, and the United
disparitiesreducedsubstan-tially
substan-tially
disparitiesreducedsubstantially
Output-basedconditionaltransfers
No
Yes
Yes
No
No
No
No
No
No
No
No
Yes
State tax per-formance
Weak
Strong
Strong
Strong
Fair
Weak
Weak
Fair
Fair
Weak
Strong
Strong
Local fiscalautonomy
Fair
Fair
Strong
Fair
Weak
Weak
Weak
Fair
Fair
Fair
Strong
Strong
Equalizationformula
Paternalcapacityand need
Implicitandpiecemeal
Paternalfiscalcapacity
Fraternalfiscal capac-ity
Implicitandpiecemeal
Paternalcapacityand need
Implicitandpiecemeal
Paternalfiscalcapacity
Implicit
Paternalcapacityand need
Mixedcapacityand need
Implicit andpiecemeal
Equalizationstandard
Implicit
Implicit
Explicit
Explicit
Implicit
Iimplicit
Implicit
Explicit
Implicit
Implicit
Implicit
None
State tax baseconformity
Yes
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
No
State tax rateuniformity
Yes
Yes
No
Yes
No
No
Yes
No
No
Yes
No
No
State-local grossrevenues moreor less matchresponsibility
Yes
Yes
Yes
Yes
No
No
No
No
Yes
Yes
Yes
Yes
Note
: * – constitutionally recognized fiscal tiers;
lc
ca
- coordinate authority model
Source
: Author’s impressions
Table 1A comparison of selected fiscal systems (
Continued
Selected indicators
Australia
Brazil
Canada
Germany
India
Malaysia
Nigeria
Russia
Spain
South Africa
Switzerland
United States
374 Anwar Shah
States. In the latter group of countries, federal influence over state ex-
penditures is quite limited, and state governments have considerable
authority to determine their own tax bases and tax rates (see tables 2
and 3). In centralized federations, conditional grants by the federal
government play a large role in influencing the priorities of regional
and local governments. In Australia, a centralized federation, the fed-
eral government is constitutionally required to follow regionally differ-
entiated policies.
Federal countries also vary according to the process of provincial/
state influence on national policies. In some countries, there is a clear
separation of national and state institutions (“executive” or “interstate”
federalism) and the two levels interact through meetings of officials and
ministers, as in Australia, Brazil, Canada, India, Malaysia, Nigeria, Spain,
and Switzerland. In Germany and South Africa, state governments have
a direct voice in national institutions; that is, in both these countries,
state governments are represented in the second house of parliament –
the Bundesrat in Germany and the Council of the Provinces in South Af-
rica (“intrastate” federalism). This is to be expected in view of the pri-
macy of national legislation in all functions and the need for state
government inputs for such legislation in these countries. Such arrange-
ments, however, limit the autonomy of both the federal and state gov-
ernments in Germany, creating an indecision trap associated with this
“spaghetti-bowl” politics, as suggested by Feld and von Hagen (see chap-
ter on Germany). In Russia, the Federation Council (upper chamber),
as envisaged by the Constitution, was expected to have the governor and
the speaker of the legislature of each region represented in it. The
Constitution has now been amended to have the one executive member
nominated by the governor and the one legislative assembly member
nominated by the legislative assembly of each region represented in the
Federation Council, thereby weakening the regional influence at the
centre. This comes in the wake of an important change in the election
of governors – no longer directly elected but nominated by Russia’s
president and appointed by the regional legislature. In Brazil, India,
Malaysia, and the United States, regional and local coalitions play an im-
portant role in the second chamber of the national legislature. This role
may not support the positions taken by states’ executives and therefore
works to diffuse regional tensions. In Brazil, because all states have
equal representation in the Senate, small states in the northeast have a
disproportionate influence on the federal system. In Canada, the mem-
bers of the second chamber are nominated by the prime minister; there-
fore, the Senate is considered to be more technocratic in its orientation
as members are often appointed based upon recognition of their service
achievements in government, politics, or business.
Federal-state intergovernmental
transfers:
Fiscal capacityequaliza-
tion
Expendi- ture needs
equaliza-
tion
Ability to borrow from
domestic
banks/higher orders of government
Ability to
issue domestic
bonds
Ability to borrowfrom for- eign banks
Ability to
issue foreignbonds
Overall
fiscal
decentrali-
zation to provinces/
states
Country
Range of provincial/ state govern-ment respon-
sibilities
Provincial
govern-
ment influ-
ence onnationalpolicies
National governmentinfluence on
provincial
policies
Provin- cial/staterevenues
finance majority ofprovincialexpenditure
Important/ unimportant
Predominantemphasis on
conditional grants/ unconditional grants/
tax sharing/revenue
sharing
Nigeria
Extensive
Fair
Strong
No
Important
Revenue sharingand conditionalgrants
No
Yes
Yes
Yes
No
No
Medium
Russia
Extensive
Weak
Strong
No
Important
Equalization andconditional grants
Yes
Yes
Yes
Yes
Yes
No
Medium
Spain
Extensive
Fair
Strong
Yes
Important
Revenue sharing,and conditionalgrants
No
Yes
Yes
Yes
Yes
Yes
Medium
South Africa
Extensive
Weak
Strong
No
Important
Unconditionalgrants and condi-tional grants
No
Yes
Yes
Yes
No
No
Low
Switzerland
Extensive
Strong
Weak
Yes
Important
Equalization andconditional grants
Yes
Yes
Yes
Yes
Yes
Yes
High
United States Extensive
Fair
Fair
Yes
Unimportant Conditional grants
No
No
Yes
Yes
Yes
Yes
High
Table 2Fiscal decentralization to provinces/states (
Continued
Table 3Fiscal decentralization to local governments Country
Local
governments
are creatures of
provinces/
states
Range of local
government
responsibilities
Local
government
influence on state/
provincial policy
Local
governmentinfluence on
federal policy
Local fiscal
capacity
equalization
Local
expenditure
needs
equalization
Ability to
borrow from
domestic banks
Ability to
issue domestic
bonds
Overall fiscaldecentraliza-
tion to local
governments
Australia
Yes
Limited
Weak
Weak
Yes
Yes
Yes
No
Low
Brazil
No
Extensive
Weak
Weak
No
Yes
No
Yes
High
Canada
Yes
Extensive
Weak
Weak
Yes
Yes
Yes
Yes
High
Germany
Yes
Extensive
Weak
Weak
Yes
Yes
Yes
Yes
High
India
Yes
Limited
Weak
Weak
No
Yes
No
Yes
Low
Malaysia
Yes
Limited
Weak
Weak
No
Yes
No
No
Low
Nigeria
No
Extensive
Weak
Weak
No
Yes
Yes
Yes
Medium
Russia
Yes
Extensive
Weak
Weak
Yes
Yes
Yes
Yes
Medium
Spain
Yes
Extensive
Weak
Weak
Yes
Yes
Yes
Yes
Medium
South Africa
No
Extensive
Weak
Fair
No
Yes
Yes
Yes
High
Switzerland
Yes
Extensive
Fair
Fair
Yes
Yes
Yes
Yes
High
United States
Yes
Extensive
Weak
Weak
No
Yes
Yes
Yes
High
Comparative Conclusions 379
being in South Africa. However, this role remains large in all the case study
countries with regard to the delivery of social and infrastructure services,
with the exceptions of Malaysia and South Africa, where such services are
centralized. In Canada, provinces have a role in immigration policy and in
regulating securities and labour markets, thus creating the potential for in-
efficiencies in the internal common market.
Local government responsibilities are extensive in Switzerland, the
United States, Brazil, and Canada; quite restricted in Spain, India, Russia
and Malaysia; and highly constrained in Australia (see figure 1). In Spain,
basic education and basic health care are intermediate-order responsibili-
ties. In Russia, several local services, such as public transit, roads, and fire
prevention, are regional government functions, whereas local police pro-
tection and local tax collection are federal responsibilities. In Australia, lo-
cal governments play an insignificant role in public service delivery and are
primarily responsible for property-oriented services such as garbage collec-
tion and street maintenance and cleaning.
Figure 1
Subnational expenditure as a% of total government expenditure
Sources : Various chapters in this volume; Government Finance Statistics Yearbook (various issues) Washington,
dc: International Monetary Fund.
380 Anwar Shah
Overall, with the exception of Spain, Brazil, Australia, and Malaysia, sub-
national expenditures in the case study countries account for 50 percent
or more of consolidated public expenditures, with state and local govern-
ments in Switzerland and Canada accounting for more than 60 percent of
such expenditures (see Figure 1).
Shared rule is sometimes a source of confusion and conflict. In Canada,
the provinces have attempted to limit the federal spending power in social
services by entering into a social union framework agreement with the fed-
eral government. In Germany, where the intertwining of federal and state
powers is an issue, the Federalism Reform Act, 2006, limits federal laws re-
quiring the consent of the Bundesrat (second chamber) to specified areas
and also gives states flexibility to deviate from a federal law in its implemen-
tation. In Switzerland, ambiguity with regard to shared rule is avoided by
having intergovernmental agreements and contracts. In the United States,
Russia, and South Africa, unfunded or underfunded federal mandates rep-
resent sources of concern for state (province/region) governments.
Allocation of taxing Powers
Taxing powers (tax base and rate determination and tax collection) are
highly centralized (75 percent or more central revenues) in Malaysia,
South Africa, and Australia; centralized (60 percent to 75 percent of reve-
nues collected by the centre) in Brazil, India, Russia, and the United
States; highly decentralized in Switzerland (37 percent of total revenues
collected by the centre); and decentralized (40 per cent to 50 percent at
the centre) in Canada and Nigeria. Other countries fall in the intermedi-
ate range. In Russia, the centralization of tax administration has resulted in
a weaker effort in collecting state (regional) and local taxes.
The tax powers of state governments are wide in Switzerland, Canada,
the United States, Brazil, and Nigeria and are quite restrained in South
Africa, Australia, Spain, and Malaysia (figure 2). Expenditure autonomy
as determined by the percentage of expenditures financed by the own-
source revenues of states is high in Malaysia, Nigeria, Switzerland, Ger-
many, Canada, and the United States but low in India and Spain (with the
exception of the two regions) (figure 3). State tax autonomy (having
responsibility for base and rate determination of own taxes) is high in
Australia, Canada, Switzerland, the United States, Nigeria, India, and
Brazil but constrained in Germany, Spain, Malaysia, and Russia. In the lat-
ter countries, states may be given some discretion in setting tax rates but
tax-base determination is a federal responsibility. Further, regional gov-
ernments in Russia do not have revenue autonomy. Taxing e-commerce
and mobile factors are important issues imposing limitations on state fi-
nances in the United States and India.
382 Anwar Shah
institutionalization of tax administration by creating an independent agency
with oversight by federal and provincial orders and the private sector. In
other countries, tax harmonization has been achieved by centralizing tax-
base determination and/or tax collection.
The case study countries, with the exception of Nigeria, follow the golden
rule principle in borrowing (i.e., borrowing for capital spending only), and
they primarily depend on capital-market discipline to restrain such borrow-
ing by state and local governments. In Nigeria, all borrowings by state and
local governments require prior federal approval. In Malaysia, local bor-
rowing is subject to state government supervision. Such direct borrowing is
typically discouraged; instead, private-sector participation in infrastructure
provision is encouraged. In Brazil, external debt requires approval by the
federal Senate, and all borrowing is subject to legislated fiscal rules. Several
federal countries have special arrangements to assist state and local borrow-
ing for capital projects. In Australia, the Australian Loan Council facilitates
such borrowing by making data on public finances available to the capital
Figure 3
Subnational own source revenues resources as a% of total government revenues
Sources : Various chapters in this volume; Government Finance Statistics Yearbook (various issues) Washington,
dc: International Monetary Fund.
Comparative Conclusions 383
markets. In Canada, provincial Crown corporations that run on commercial
principles assist local borrowing. In the United States, state bond banks (pri-
vate agencies) collate local borrowing demands and issue bonds for the
pooled demand. Also in the United States, interest on such borrowing by
state and local governments is deductible against federal income-tax liability –
providing a direct federal subsidy for such borrowing. In Switzerland, the
Cooperative Centre of Swiss Local Communities provides capital finance to
local governments.
There is no evidence of a race to the bottom due to state and local tax
autonomy in the case study countries. Most countries do not show any seri-
ous tax competition, and where such competition has surfaced – such as in
Brazil, Switzerland, and, to a more limited extent, India, Canada, and the
United States – it has not resulted in a lower tax effort and lower quality of
state and local public services.
In general, taxing powers in the sample countries are more centralized
than dictated by fiscal federalism principles. Many factors may have been in-
volved in achieving this result. This may have happened partly because most
nations placed a premium on tax harmonization. Also, shifting expenditures
downward was politically more feasible than allowing finance to follow func-
tion, and state and local politicians were less than enthusiastic about assum-
ing taxing powers but very interested in receiving fiscal transfers from the
national government with little accountability to local taxpayers.
Vertical Fiscal Gaps
A downside of over-centralized tax powers with decentralized expenditure
responsibility is the creation of vertical fiscal gaps, or the mismatch between
revenue means and expenditure needs among state and local governments
(see table 4 for details). Vertical fiscal gaps and revenue autonomy in subna-
tional governments remain concerns in those federal countries where the
centralization of taxing powers is greater than is necessary to meet federal
expenditures and federal fiscal transfers to meet national objectives as this
results in extensive use of conditional transfers to exert undue influence on
subnational policies. Further, such large gaps create democratic accountabil-
ity deficits as state and local governments experience the pleasure of spend-
ing money without having to justify additional spending to their taxpayers.
This is a concern for state governments in Australia, Germany, India, Malay-
sia, Nigeria, Russia, Spain, and South Africa. In Nigeria, there is a special
concern about the central assignment of resource revenues. In Germany,
these concerns are prompting a wider review of the assignment problem and
a rethinking of the division of powers among federal, Land, and local gov-
ernments. A consensus is yet to be formed on a new vision of fiscal federal-
ism in Germany.
Comparative Conclusions 385
3 f i s c a l f e d e r a l i s m a n d m a c r o e c o n o m i c
m a n a g e m e n t
Federal fiscal systems aspire to provide safeguards against the threat of cen-
tralized exploitation as well as decentralized opportunistic behaviour while
decision making remains close to the people. In fact, federalism represents
either a “coming together” or a “holding together” of constituent geo-
graphic units to take advantage of the greatness and littleness of nations.
But federal fiscal systems whose purpose is to accommodate such “coming
together” or “holding together” may pose some risks for macro stability.
Two main issues raised by the case study countries on this count are (1) fis-
cal discipline and (2) intergovernmental competition.
Fiscal Prudence and Fiscal Discipline under “Fend-for-Yourself” Federalism
Fiscal lack of discipline among subnational governments is a matter of con-
cern in federal countries in view of significant subnational autonomy com-
bined with an opportunity for a federal bailout. In mature federations,
fiscal policy coordination to sustain fiscal discipline is exercised through
both executive and legislative federalism as well as by instituting formal
Country
Revenue share Fiscal gap
Level of
government
Before
transfer
After
transfer
Expenditure
share
Before
transfer
After
transfer
South Africa ( 2002 ) National 0.82 0.36 0.49 0.33 −0.
Provincial/state 0.01 0.46 0.36 −0.34 0.
Local 0.16 0.18 0.15 0.01 0.
Switzerland ( 2002 ) National 0.37 0.30 0.31 0.06 −0.
Provincial/state 0.38 0.42 0.42 −0.03 0.
Local 0.24 0.28 0.27 −0.03 0.
United States ( 2004 ) National 0.55 0.44 0.46 0.09 −0.
Provincial/state 0.25 0.29 0.24 0.01 0.
Local 0.20 0.27 0.30 −0.10 −0.
Sources : Various chapters in this volume; Government Finance Statistics Yearbook (various issues) Washington,
dc: International Monetary Fund.
Table 4
Vertical fiscal gaps ( Continued )
386 Anwar Shah
and informal fiscal rules. In recent years, legislated fiscal rules have come
to command greater attention. These rules take the form of budgetary bal-
ance controls, debt restrictions, tax or expenditure controls, and referen-
dums for new taxing and spending initiatives. Most mature federations also
specify “no bailout” provisions in setting up central banks. In the presence
of an explicit or even implicit bailout guarantee and preferential loans
from the banking sector, printing of money by subnational governments is
possible, thereby fuelling inflation. Recent experiences with fiscal adjust-
ment programs suggest that, while legislated fiscal rules are neither neces-
sary nor sufficient for successful fiscal adjustment, they can help forge a
sustained political commitment to achieve better fiscal outcomes, espe-
cially in countries with divisive political institutions or coalition regimes.
For example, such rules can be helpful in sustaining political commitment
to reform in countries with proportional representation (Brazil) or multi-
party coalition governments (India) or in countries with a separation of
legislative and executive functions (United States and Brazil). Fiscal rules
in such countries can help restrain pork-barrel politics and thereby im-
prove fiscal discipline, as has been demonstrated by the experiences in
Brazil, India, Spain, Russia, and South Africa.
Brazil’s success with fiscal rules from 2001–07 is particularly remarkable.
Germany, however, could not achieve fiscal discipline on the part of the
Länder, even with fiscal rules, because the federal Constitutional Court
had blessed federal bailouts, thereby creating soft budget constraints for
them. A more recent decision (November 2006) by the same court to disal-
low a requested bailout by Berlin indicates a reversal of such policies. In
the United States, fiscal conservatism on the part of states ensures fiscal dis-
cipline, but pork-barrel politics in the federal government has not been re-
strained by fiscal rules. Australia and Canada achieved the same results
without having any legislated fiscal rules, whereas fiscal discipline contin-
ues to be a problem even though Germany has legislated fiscal rules. The
Swiss experience is the most instructive with regard to sustained fiscal disci-
pline. Two important instruments create incentives for cantons to maintain
fiscal discipline. First, fiscal referendums allow citizens the opportunity to
veto any government program; second, the legal provision enacted in
some cantons to set aside a fraction of a fiscal surplus in good times works
like a “debt brake” for rainy days (in the United States, these are called
rainy-day funds).
Intergovernmental Competition
Competition among state and local governments is quite common in most
federal systems. It occurs through lobbying for employment by: generating
federal or private-sector projects, including military bases; encouraging
388 Anwar Shah
vertical fiscal gaps, (2) bridging the fiscal divide within nations, and (3) se-
curing a common economic union through establishing national mini-
mum standards in social and infrastructure services. The following
paragraphs discuss how these objectives are addressed through fiscal trans-
fers in the case study countries.
Bridging vertical fiscal gaps
Vertical fiscal gaps, at least at the conceptual level, are largely a non-issue
in Canada, the United States, and Switzerland because state governments
have sufficient fiscal powers to overcome such gaps. In Canada, the federal
government used tax abatement as well as incentives for tax-base sharing to
overcome such a gap in the past. These vertical gaps represent a significant
issue in the remaining case study countries as they have centralized tax ad-
ministration and constrained state and local taxing powers. To overcome
such gaps, general revenue sharing, with a multitude of equalization
Figure 4
Transfers as a % of subnational expenditure
Sources: Various chapters in this volume; Government Finance Statistics Yearbook (various issues) Washington,
dc: International Monetary Fund.
Comparative Conclusions 389
components, is being used in Brazil, India, Malaysia, and Nigeria. Ironi-
cally, in India such revenue sharing uses 1971 population data as the basis
for allocating finds among states; in Brazil, state and municipal coefficients
are frozen at 1988 levels. Tax-base sharing and tax-by-tax sharing is used in
Germany; fiscal need equalization grants are used in Australia, Russia, and
Spain (mostly historical expenditures). For most countries in our sample,
fiscal transfers reverse the fiscal position of the federal government from
surplus to deficit (see table 4).
Bridging the fiscal divide within nations
The fiscal divide within nations represents an important element of the
economic divide within nations. Such a divide is a matter of concern in all
the case study countries, with the important exception of the United
States. In Canada, such a divide is accentuated by provincial ownership of
natural resources and soaring oil and gas prices. Fiscal equalization pro-
grams, with the objective of enabling constituent units to provide reason-
ably comparable levels of public services at reasonably comparable levels of
taxation, are frequently advocated to overcome such a divide. Such pro-
grams are expected to foster goods and factor mobility and help secure a
common economic union.
Among the case study countries, Australia, Canada, Germany, Malaysia,
Russia, Spain, and Switzerland attempt to address regional fiscal disparities
through a program of fiscal equalization. In the United States, there is no
federal program because factor mobility has served to bridge fiscal and
economic differences to a great extent, although such differences within
states remain a matter of policy concern. And, for that reason, state educa-
tion finance typically uses equalization principles. In Canada, such a pro-
gram is enshrined in the Canadian Constitution and is termed “the glue
that holds the federation together.” Such programs in the case study coun-
tries are federally financed, with the exception of Germany and Switzer-
land. In Germany, wealthy states make progressive contributions to the
equalization pool, and the poor states receive from this pool. In Switzer-
land, the new equalization program, effective in 2008, has a mixed pool
of contributions from the federal government and wealthier cantons. In
Russia, equalization programs conducted by regions for local equalization
use the mixed approach.
All the case study countries with an equalization program have some focus
on fiscal-capacity equalization. Australia, in addition, has a comprehensive
approach to fiscal-need equalization. Spain equalizes fiscal need based on
historical expenditures, and both Russia and Malaysia consider partial equal-
ization of expenditure needs based on selected need indicators. The Cana-
dian and German equalization programs use an explicit fiscal-capacity
