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Published byCollin Barker Modified over 9 years ago
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Equalization grants International Experience Indonesia’s Options Bert Hofman, World Bank with thanks to Jun Ma, Ehtisham Ahmad
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Equalization grants zImportance of grants zRationale for grants zTypes of grants zEqualization grants zExamples of equalization grants zIssues 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 zVertical imbalance zHorizontal imbalance zSpill-overs zNational priorities zNation building
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Vertical Imbalance
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Types of grants zGeneral Grants zConditional/specific grants yMatching and Non-matching Grants yOpen Ended and Closed-Ended Grants zBlock grants zEqualization grants
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Issues in equalization grants design zShould one equalize? zWhat to equalize zExpenditure needs zFiscal capacity zSource of fund zMinimum standards zCapital spending zEqualizing grant and other grants
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Equalization zOperational definition: “enable similar levels of service delivery at similar levels of taxation” zPrinciple: zEqualization Grant=Expenditure Needs- Fiscal Capacity zPractice: zfiscal capacity only (Canada) zfiscal capacity and some needs (Germany) zfiscal capacity and elaborate needs (Australia)
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Examples of Equalization zAustralia zGermany zJapan zKorea zChina
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Australia zFederal Country zLarge Vertical Imbalance zStrongly Equalizing Grants System zRevenue Capacity: Tax Base * Average National tax Rate zExpenditure Needs: z14 categories (Health, Education, etc.) z25 “disability factors” (factors that increase standard costs), composed of multiple indicators zSpecial grants subtracted from grant entitlement zExcellent administration by the Grants Commission
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Germany zFederal country zSubstantial tax sharing zVAT redistributed per capita--provides most of the equalization zFiscal Equalization through Finanzausgleich (Financial Settlement) zPrinciple: equalize needs-adjusted fiscal capacity zNeeds: “special burdens” for city states zEvery state obtains at least 95 percent of average revenues z“Rich states” are taxed--discourages tax effort yTax capacity over 110 percent of average tax with 80 percent zEastern, poor states receive additional grants from central government
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Japan zUnitary country zLarge vertical imbalance zEqualization through “Local Allocation Tax”--both provinces and municipalities zConsiders fiscal capacity and needs zNeeds based on functions assigned to government
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Japan Cont. zBasic need = modification coefficient * unit cost zmodification coefficients examples: zschool types zsize of region zpopulation density in region zcold area zurbanization of region zMOF Administers
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Korea zUnitary country zSimilar to Japan’s system zFiscal capacity and needs z“Fiscal scarcity= standard need - standard revenue” zNeeds = standard fiscal need + supplemental need z 29 standard factors zSeparate education transfer zMinistry of Home Affairs Administers
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China zSee Mr. Zhang’s speech
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Overview of Equalization around the World
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Indonesia: Law 25/99 zNatural resource sharing yoil & gas yother z25 percent of domestic revenues for general grant zDistribution according to ythe region’s needs ythe region’s 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 Indonesia’s Equalization Grants Design zDefining Expenditure Needs èDetermine expenditure assignments zDefining Revenue Capacity èLocal tax base expansion? zHow Much Equalization zData Requirements zConsultation & Discussion zGrants Administration zTransition Arrangements
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Goal zNot z“Make every region happy” zBut z“Make Every Region Reasonably Unhappy”
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