Equalization payments

Equalization payments are cash payments made in some federal systems of government from the federal government to subnational governments with the objective of offsetting differences in available revenue or in the cost of providing services.

They are generally calculated based on the magnitude of the subnational "fiscal gap": essentially the difference between fiscal need and fiscal capacity. Fiscal capacity and fiscal need are not equivalent to measures of fiscal revenue and expenditure, as making them so would induce perverse incentives to subnational governments to reduce fiscal effort.