Principle of fiscal equivalence
The principle of fiscal equivalence is a term from public finance . It is about the state redistribution of funds and shows how these can be redistributed in an economically sensible way. It follows the economic principle of fair performance .
Explanation
background
In a country, the question often arises as to the justification for fiscal redistribution. If, for example, a city wants to receive funding from the federal government, this redistribution has to be legitimized in a meaningful way so that not every city can lay claim to such funding. The principle of fiscal equivalence clarifies whether and to what extent an allocation for certain purposes is justified.
justification
If a local, state-provided service generates positive external effects (“ spillovers ”), then it is justified that surrounding or higher-level bodies co-finance these services.
However, not only the surrounding corporations benefit from this, but also the provider of the service. The principle of fiscal equivalence states that the provider's own contribution to the financing of the service should correspond to its own benefit.
example
A city school usually generates positive external effects because the students could move to the surrounding area after their training, which means that surrounding cities could also benefit from the training. Therefore, the city in question will not bear the costs for the school alone, but will be financially supported by higher-level bodies (district, state, federal). However, according to the principle of fiscal equivalence, the city should bear part of the costs, since not all students will move away, but a certain part will also stay in the city. Ideally, the city's share of the costs should correspond exactly to the benefits that it will retain from the school.
Problems
Basically, it is very difficult to estimate exactly which area will benefit how much from which government service. That is why there are often disputes in politics about the proportion of funding for publicly provided services.