Rearranging the last expression gives (RCi Tui +Tei )/( EIi Pi ) = (RC/ P) (I2) – • К• From this latter expression it becomes clear that the proposed allocation mechanism brings the per capita level of potential revenues adjusted for expenditure needs to the same level equal to the fraction of the region-average revenue capacity. К To show the difference the proposed mechanism makes compared to the standard definition of the fiscal gap, equation (I2) in an equivalent form by substituting ENi * RCi, – let’s rewrite (ENi/ Pi )/ (EN/ P) for EIi and rearranging terms: Ti = Tei Tui = (RC/ ( EIi Pi ) RCi= – К• P)• • – (RC/ ( [(ENi/ Pi )/ (EN/ P)] Pi ) RCi= =К• P)• • – (RC/ ENi RCi (I3) =К• EN )• – From (I3) it is clear that in the proposed formula the availability of funds only affects the sensitivity of the grant amount with respect to expenditure needs, while disparities in revenue capacities translate one-to-one into the differences in the grant amount. To further illustrate this point, let us consider a given pool of funds (Pool) and determine the extent of equalization under the proposed and the standard definitions of the fiscal gap. Under the proposed approach, Pool = Ti = (RC/ (ENi) RCi = (RC/ (Σi ENi) RCi = RC Σi Σi К• EN )• – Σi К• EN )• – Σi • RC. К – Therefore, Substituting the latter into (I3) yields, К= (Pool +RC)/RC. Ti = (RC/ (ENi) RCi ENi RCi [(Pool +RC)/RC]• EN )• – =[(Pool +RC)/EN]• – It is clear that a larger pool makes the transfer size more sensitive to differences in the expenditure needs but does not affect the sensitivity of the grant amount with respect to disparities in revenue capacity. The only case when this mechanism would treat revenue and expenditures equally is when (Pool +RC)/EN = 1, that is when Pool = EN– RC.
Rearranging the last expression gives (RCi – Tui +Tei )/( EIi • Pi ) = К• (RC/ P) (I2) From this latter expression it becomes clear that the proposed allocation mechanism brings the per capita level of potential revenues adjusted for expenditure needs to the same level equal to the fraction К of the region-average revenue capacity. To show the difference the proposed mechanism makes compared to the standard definition of the fiscal gap, ENi * – RCi, let’s rewrite equation (I2) in an equivalent form by substituting (ENi/ Pi )/ (EN/ P) for EIi and rearranging terms: Ti = Tei – Tui = К• (RC/ P)• ( EIi • Pi ) – RCi= =К• (RC/ P)• ( [(ENi/ Pi )/ (EN/ P)] • Pi ) – RCi= =К• (RC/ EN )• ENi – RCi (I3) From (I3) it is clear that in the proposed formula the availability of funds only affects the sensitivity of the grant amount with respect to expenditure needs, while disparities in revenue capacities translate one-to-one into the differences in the grant amount. To further illustrate this point, let us consider a given pool of funds (Pool) and determine the extent of equalization under the proposed and the standard definitions of the fiscal gap. Under the proposed approach, Pool = Σi Ti = Σi К• (RC/ EN )• (ENi) – Σi RCi = К• (RC/ EN )• (Σi ENi) – Σi RCi = RC • К – RC. Therefore, К= (Pool +RC)/RC. Substituting the latter into (I3) yields, Ti = [(Pool +RC)/RC]• (RC/ EN )• (ENi) – RCi =[(Pool +RC)/EN]• ENi – RCi It is clear that a larger pool makes the transfer size more sensitive to differences in the expenditure needs but does not affect the sensitivity of the grant amount with respect to disparities in revenue capacity. The only case when this mechanism would treat revenue and expenditures equally is when (Pool +RC)/EN = 1, that is when Pool = EN– RC.
700970ESW0P11700B00PUBLIC00Belarus.docx