Decentralisation of government creates fiscal disparities: some subnational governments can provide their citizens with more public services than others. Many countries try to equalise fiscal disparities by targeting grants at disadvantaged jurisdictions. This is especially difficult for developing countries, where data are scarce. We develop a method to estimate spending needs of local governments in developing countries. We apply this method to health spending by Tanzanian districts, but it can be used in other areas and other countries as well. We use our estimates to derive an equalising grant allocation formula. A comparison with the existing grant allocation indicates that more deprived districts should receive higher grants than they obtain now.
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