Federations often experience vertical fiscal imbalances between central and regional governments resulting from the division of tax and spending powers. There may also be fiscal imbalances between regions. Horizontal fiscal equalisation is a transfer program to reduce differences in the fiscal capacities of regional governments.1 It seeks to give regional governments the potential to provide similar services without imposing significantly different tax burdens on their citizens. Many federations have some form of horizontal fiscal equalisation.

A wide range of approaches to horizontal fiscal equalisation are found in practice. Each is unique to a country’s political, historical and economic origins. However, there are common themes. This paper explores some of these themes. It focuses on the fiscal equalisation arrangements in four federations: Australia, Canada, Germany and Switzerland.

The paper first describes the different approaches to fiscal equalisation in these countries. It then draws out themes that are relevant to the Australian experience of equalisation.