EQUALIZATION SYSTEMS IN THE COUNTRIES OF

only one of the budget equalization models. Basically, there is a combination of different models and methods of horizontal and vertical equalization of income and expenses. The basis of the construction of budget equalization systems are the coefficients and formulas used to determine the size of equalization transfers. Systems that include elements of income equalization usually rely on a standard set of taxes and standard tax rates. At the same time, one of the solutions is to use a small set of taxes. Expenses equalization systems are more complex because cost estimation often involves a large number of factors. In some countries, regression-based standardized costing approaches have been used. Budget equalization systems are not static entities, the norm of the need for their periodic analysis and evaluation is often included in the legislation underlying them. Such an analysis can lead to reforms of budget equalization systems. Several key factors motivating the reform of equalization systems were identified: growing or high levels of inequality in the fiscal capabilities of communities, regional incomes or the provision of public services; insufficient fiscal autonomy; unstable and non-transparent budget alignment; inadequate incentives and lack of political neutrality in the budget equalization system. Reform of budget equalization systems in OECD countries is carried out in the following directions: transition to systems based on rules; increasing the fiscal autonomy of communities; simplification of alignment formulas; simplification of the representative tax system; periodic review of alignment formulas. Conclusion. In practice, there are very few countries that use only one of the budget equalization models. Basically, there is a combination of different models and methods of horizontal and vertical equalization of income and expenses. The basis of the construction of budget equalization systems are the coefficients and formulas used to determine the size of equalization transfers. The income equalization system relies on a standard set of taxes and standard tax rates. Cost equalization systems are more complex because cost estimation often involves a large number of factors. Budget equalization systems are not static entities, the norm of the need for their periodic analysis and evaluation is often included in the legislation underlying them.


Problem statement and its connection with important scientific and practical tasks.
As a result of the decentralization reform in Ukraine, the budget equalization system has changed. However, the introduction of the new system is associated with the problems of reducing the financial autonomy of local authorities, the instability of the legislative framework for budget regulation, the risks of budget imbalances, and the violation of social justice in the provision of public services.
Analysis of recent publications on the problem. The issue of budget equalization has been investigated in the scientific works of domestic and foreign scientists. The essence of this phenomenon in the countries of the Organization for Economic Cooperation and Development Allocation of previously unsolved parts of the general problem. Budget equalization in OECD countries has been sufficiently researched. However, some aspects of budget equalization require additional study and analysis. This concerns a more thorough consideration of the horizontal equalization of incomes and the vertical equalization of expenses, the development of expenditure standards, and the formation of a representative tax system.
Formulation of research objectives (problem statement). To carry out an analysis of budget equalization systems in the countries of the Organization for Economic Cooperation and Development and to substantiate the possibility of using foreign experience of budget equalization in Ukraine.
An outline of the main results and their justification. In OECD countries, budget equalization is defined as a system of tools and measures to eliminate budget imbalances by redistributing resources vertically between the links of the budget system and horizontally between administrative-territorial units (hereinafter -ATU) (Pyontko, N., 2015). Its goals are:  ensuring equal access to public services of the population in different ATU;  solving the problem of inconsistency of the budgets' own revenues with the spending powers of local authorities;  reduction of territorial disproportions of development arising as a result of uneven formation of the revenue base of local budgets (Storonyanska, I. & Benovska, L., 2020).
Most authors agree that any budget equalization model is based on the following principles:

ECONOMIC INNOVATIONS
Vol. 24, Issue 3 (84) 2022  clear separation of powers in the field of spending between different levels of government;  endowment of each level of power with sources of income sufficient to implement own and delegated powers;  use of transfers to smooth out vertical and horizontal imbalances of lower budgets in order to ensure a certain standard of public services throughout the country;  taking into account historical, national and political traditions and features, form of the state system, size of the country and the population.
Implementation of budget equalization in one or another country depends significantly on its state system. Comparing the financial support of the budgets of unitary and federal states, we see a characteristic feature -the presence of budgets of federation members (regions) as an additional level of the budget system. With the presence of such links, a more rational and clear distribution of powers and financial resources is ensured between different authorities than in unitary states, but at the same time, a higher level of responsibility of additional links of the budget system for the socio-economic development of regions is also observed (Pyontko, N., 2015).
In foreign practice, several basic models of budget equalization are distinguished (Sean Dougherty & Kass Forman, 2021): 1. Horizontal equalization of incomesredistribution of financial resources between Administrative-territorial communities budgets of the same level to reduce disparities between them in incomes; 2. Vertical equalization of expensesredistribution of financial resources between upper and lower level budgets to reduce disparities between lower level ATUs in expenses; 3. Vertical equalization of incomesredistribution of financial resources between upper and lower level budgets to reduce disparities between lower level ATUs in income; Model of horizontal equalization of incomes. It is used to reduce differences in income between ATUs of the same level. Its wide use, to a large extent, is due to the ease of use and the need for a small information base. Its main drawback is that, as a result of its use, we do not get an answer to the question of whether ATU has become capable, or how close it has come to it. A representative taxation system with a standard set of taxes is used to assess the possibility of revenue collection. For example, in Finland it consists of three taxes (personal income tax, profit tax and property tax). In Ukraine, it consists of one tax at the basic level -personal income tax, and at the regional level from twopersonal income tax and corporate profit tax.
In most countries, ATU assistance to the "poor" is limited, that is, there is an upper limit to the total amount of the transfer or a clear formula for its calculation (Table 1). Leveling is deliberately kept below 100% to encourage the development of own-source income.
Evaluating fiscal equalization The level at which income is withdrawn from the "rich" ATU is the most controversial issue in fiscal policy. A significant withdrawal, which in isolated cases reaches 100% of the excess of the average tax capacity, can reduce the ATU's efforts to increase their fiscal base A model of vertical cost equalization. It has wide application and is used to redistribute budgetary resources between upper and lower level budgets to reduce disparities between lower level ATUs in spending. Cost equalization is the transfer of financial resources to reduce differences between ATUs in per capita costs for providing a standard set of public services (OECD, 2007).. Table 1.

Model of horizontal income equalization in OECD countries and Ukraine
Country Withdrawal of income from the "rich" ATU Transfers to the "poor" ATU Finland 40% for municipalities with tax revenues above 90% of the average tax capacity 90% of the amount necessary for municipalities to reach the level of 90% of average tax opportunities Norway 100% for municipalities with tax revenues above 134% of the average tax capacity 90% of the amount required for municipalities to reach the level of 110% of the average tax capacity Sweden 85% for municipalities with tax revenues above 115% of the average tax capacity 95% of the amount necessary for municipalities to reach the level of average tax capabilities Poland 20% for communes with tax revenues above 150% of the average tax capacity 80% of the amount necessary for municipalities to reach the level of 92% of average tax opportunities Ukraine 50% for communities with tax revenues above 110% of the average tax capacity 80% of the amount necessary for communities to reach the level of 90% of average tax opportunities An important advantage of this model is that as a result of its use, we get an answer to the question of whether the ATU has become capable, or how close it has come to it. Moreover, the main goal of this model is to ensure equal access to public services, as opposed to simple income equalization. A necessary condition for the application of the model of vertical equalization of costs is the availability of cost standards for the provision of public services.
Cost standards for the provision of public services OECD countries have been successful in setting cost standards for individual servicessuch as the cost of educating one student in primary school or the cost of building one kilometer of road. A more complex analysis is based on cost functions. It involves relating value to a number of determinants using a large amount of data. Denmark and Norway use about 15 socioeconomic indicators to assess spending needs, Switzerland -4 geographic indicators and 6 indicators of socio-economic needs, the Netherlands -24 indicators to assess needs. Sweden uses a complex system consisting of 13 different spending models covering different government functions. The Australian system operates with more than 40 indicators, while the Korean system has around 50, which is still fewer than the United Kingdom. The French equalization system consists of seven programs with dozens of indicators (OECD, 2014). Italy has adopted a sophisticated cost measurement system that uses regression models to relate the volume of services provided to a standard cost of service. Naturally, such approaches are based on the availability of large and high-quality data. Latvia, Lithuania, Norway and Switzerland occupy an intermediate position with simpler cost equalization schemes based on a few key indicators.
Historical cost is a simpler means of estimating costs for public services, although countries are gradually abandoning it because it does not reflect true spending needs. Italy and Spain, for example, have moved from historical costing to standard costing in recent years. Finally, cost equalization can be based on actual costs, although this approach tempts ATUs to overspend and has become largely obsolete in OECD countries.
Along with the above-mentioned models of budget equalization, one more model of budget equalization should also be distinguished -"filling the gap", which combines the equalization of expenses and incomes into a single transfer designed to fill the gap between the standards of financial needs and the standards of incomes. It is important to note that the model is based on cost standards, and not on actual income and expenses, to avoid the temptation to overspend (Sean Dougherty & Kass Forman, 2021).
In practice, there are very few countries that use only one of the budget equalization models. Such an exception is Lithuania, which has a system of purely horizontal income equalization (Sean Dougherty & Kass Forman, 2021). Basically, there is a combination of different models and methods of horizontal and vertical equalization of income and expenses.
The basis of the construction of budget equalization systems are the coefficients and formulas used to determine the size of equalization transfers. Systems that include elements of income equalization usually rely on a standard set of taxes and standard tax rates. At the same time, one of the solutions is to use a small set of taxes. In Canada, the 2007 equalization reform reduced the set of 34 taxes to 5. This simplified the system and made equalization more politically neutral. In Germany, the equalization system is based on 4 general taxes, and in Ukraine, as a result of the 2014 reform, income equalization is carried out for communities on the basis of one tax (personal income tax) and for regions on the basis of two taxes (personal income tax and income tax). Table 2 shows the taxes used to determine equalizing transfers in OECD countries.
Many countries use an approach that limits equalization to below 100%. This is implemented using smoothing coefficients, which set limits on the degree of smoothing. For example, Belgium compensates regions for 80% of the gap between actual per capita income and average per capita income. In Lithuania, this indicator is equal to 90%, and in Ukraine, 80% of the difference is compensated up to 90% of the average level of income per person. On the contrary, other countries, for example, Japan and Australia, strive for full alignment in relation to spending needs (Sean Dougherty & Kass Forman, 2021).

Source: Sean Dougherty and Kass Forman (2021) Evaluating fiscal equalization
As for reverse transfers, in Norway the entire amount exceeding the level of 134% of the average tax capacity of communities is withdrawn, in Sweden 85% in case of exceeding the level of 115% of average tax revenues, and in Ukraine 50% of the level of exceeding the level of 110% of the average tax capacity. Cost equalization systems are more complex, as cost estimation is often associated with a large number of factors (Table 3). For example, in Australia, various factors are taken into account: from the length of roads to the number of pensioners. In some countries, regression-based standardized costing approaches have been used.
Budget equalization systems are not static entities, the norm of the need for their periodic analysis and evaluation is often included in the legislation underlying them. Such an analysis can lead to reforms of budget equalization systems. Japan revises its alignment system annually, while Canada, Australia, and India follow a system of five-year revisions (Sean Dougherty & Kass Forman, 2021; Common wealth Grants Commission, 2015).
Several key factors motivating reform of alignment systems were identified:  a growing or high level of inequality in the fiscal capacity of the ATU, regional revenues or the provision of public services (the main function of the equalization system is to correct inequalities that would otherwise prevent equal access to public services);  insufficient fiscal autonomy (untargeted transfers can provide local authorities with greater fiscal autonomy);  unstable and non-transparent budget equalization (formulas underlying systems of equalization or other transfers may not ensure predictability of incomes and, accordingly, the impossibility of budget planning);  inadequate incentives and lack of political neutrality in the budget equalization system (sometimes they are criticized for the fact that they allow underestimating the tax capabilities of the ATU or hinder economic growth).
Cost equalization problems have been highlighted in studies of budget equalization systems in France and Japan. As a result, it was recommended that indicators of the need for spending be separated from actual spending in order to increase political neutrality. This may include the use of cost standards. It was recommended that the equalization formulas be simplified to achieve greater transparency in Sweden, Italy and Japan. It was also recommended that cost-equalization formulas take into account changing demographics (for example, in Switzerland and Sweden). Equalization must be carefully considered to ensure that it does not increase inequality or undermine the fiscal autonomy of the ATU. Recommendations for reforming budget equalization systems in OECD countries are presented in Table 4.
In some cases, studies have shown that equalization systems fail to achieve their goals and, therefore, may increase disparities or undermine the fiscal autonomy of the ATU. For example, in France, 97.5% of municipalities received at least one type of vertical transfer in 2018 (OECD, 2019), which indicates that the scope of the system has gone beyond the traditional scope of equalization and included other types of transfers. Furthermore, the use of lump sum payments based on past tax collection capacity may perpetuate inequality. In response, the use of horizontal alignment was improved (Blöchliger, H. & C. Charbit, C., 2008). Similarly, in Austria, the use of targeted support for poorer regions was recommended simultaneously with the introduction of horizontal equalization. In the interest of increasing fiscal autonomy in Austria, it has been suggested that the ATU be allowed to retain more of its own source revenue, as Sweden and Japan have done. In practice, large-scale reforms are aimed at strengthening financial autonomy and stability at the subnational level through the adoption of rules-based equalization systems. Table 5 shows the main results of the main studies and reforms of alignment systems. In general, the reforms focus on defining a clear set of rules to increase clarity and predictability.
The case of Italy is an illustration of a comprehensive equalization reform that includes many of the elements seen in other countries. Introduced in 2011, the equalization system emerged as a result of the wider fiscal federalism reform of 2009 and included a set of measures aimed at removing the opacity that had arisen in local government finances. To avoid perverse incentives, the system uses specific cost standards, not past costs, for cost requirements. Similarly, the use of a formula-based system was aimed at increasing transparency from the perspective of local authorities. On the contrary, the former  Government, 2012). However, such rule-based approaches may be accompanied by a reduction in the influence of ministries that were previously responsible for promoting their political agenda through the provision of subsidies to local authorities. This was the case in Japan, where fears were expressed that the reduction of targeted transfers in favor of local tax would reduce the ability of ministries to achieve policy goals (OECD, 2016).
Expansion of fiscal autonomy of the ATU. The aim of the Italian reform to strengthen local fiscal autonomy can be seen in reviews of reforming equalization systems in other countries. For example, the 2008 reform in Switzerland was aimed at strengthening local financial autonomy by reducing the use of targeted transfers in favor of non-targeted transfers (Administration fédérale des finances, 2012). In Ireland, it has been recommended that local authorities be allowed to keep 100% of the property tax revenues they receive at the local level (Thornhill, D., 2015; Department of Finance, 2019). This would increase local fiscal autonomy but eliminate the horizontal component of the equalization system, which is financed by a 20 percent share of local government revenues from property taxes. Therefore, it must be replaced by vertical transfers. Conversely, the Swiss equalization reform included a renewed horizontal component of income equalization, accounting for two-thirds to four-fifths of the vertical component. Finally, the Swedish fiscal equalization reform of 2014 was aimed at allowing municipalities to retain more revenue from their own sources in favor of encouraging local economic development. However, this change was canceled two years later (Table 4).