Canada's fiscal model may be adopted

In Canada, the federal government provides money to those provinces that, according to a national model of taxes, don't derive as much from taxes because their economies are not as strong as the others.

This system takes into account equality as well as efficiency, and it is the latter that makes it an attractive model for possible adaptation in India, according to an official in the commission.

Most countries have some kind of formal equalisation scheme, i.e., a method of transferring funds to states or provinces to correct the discrepancies among sub-national governments in their capacity to raise revenue.

The objective of this scheme is to help provincial governments provide reasonably comparable levels of public services at comparable levels of taxation. Inherent in this principle is the requirement that equalisation payments should decline when a province's fiscal capacity increases.

Though the Indian federal structure had tried to achieve this objective, a lot of money was allocated without really improving the capacities and efficiencies of states or provinces, the official added.

The fact that the money received as equalisation by a province declines when its fiscal capabilities improve does not prevent it from taking action to develop its natural resources or promote any other form of economic development.

Equalisation, besides improving equity among citizens, also enhances economic efficiency by reducing distortions like migration induced by fiscal discrepancies among regions.

While there is a debate in Canada on whether the process encourages dependency of provinces on central doles and increases economic disparities, the government claims that provincial per capita real gross domestic product figures and income figures show that disparities between provinces have diminished since 1981.

The commission, which recently visited Canada, found that equalisation was the federal government's most important programme for reducing fiscal disparities among provinces.

These payments are not conditional and the recipient provinces are free to prioritise the public services they want to spend the money on.

The Canadian federal equalisation payments for 2003-04 ensure that all provinces have access to revenues of at least $5,994 per resident to fund public services. Provinces receive approximately $10.1 billion in equalisation payments from the federal government.

Model of equality

Canada's federal government provides provinces about $10.1 billion to correct fiscal disparities

In 2003-04, the payments ensured that all provinces had access to revenues of at least $5,994 per resident to fund public service projects