Intergovernmental fiscal transfers and fiscal equalisation in a time of consolidation

Sean Dougherty, Andoni Montes Nebreda and Nerea Urrutia

No 50, OECD Working Papers on Fiscal Federalism from OECD Publishing

Abstract: During periods of fiscal consolidation, governments must balance tighter budgets with equitable service delivery. This paper examines how selected countries adapt their fiscal equalisation systems under such pressures, identifying design features that preserve inter-regional fairness while maintaining efficiency. It finds that well-designed equalisation arrangements can support consolidation efforts without undermining local fiscal discipline. In particular, incentive-compatible transfer formulas – which reward subnational revenue effort and cost control – help avoid perverse effects on local budgeting. The analysis also highlights the importance of institutional resilience: legal and procedural safeguards that shield equalisation mechanisms from ad-hoc cuts can sustain stability in intergovernmental finances even during austerity. Furthermore, aligning equalisation with broader policy objectives (for example, incorporating climate or healthcare-related factors into grant formulas) emerges as a promising approach to reinforce cross-sector coherence. Overall, the paper’s comparative findings suggest that countries can pursue fiscal consolidation in a way that upholds solidarity across regions. By calibrating transfer systems with robust incentives and adaptive features, policymakers can ensure that fiscal equalisation remains effective and fair, while also advancing national goals in areas like green investment and public health.

Keywords: fiscal consolidation; fiscal equalisation; fiscal federalism; intergovernmental fiscal transfers; subnational governments; transfer formulas (search for similar items in EconPapers)
JEL-codes: H77 H81 R58 (search for similar items in EconPapers)
Date: 2025-06-30
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Persistent link: https://EconPapers.repec.org/RePEc:oec:ctpaab:50-en

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