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A Peaceful Resolution of the Israeli-Palestinian Conflict

Dr. M A Fazal

[Initially written in 2001 (updated subsequently)]

A Federal/Confederal Solution to the conflict in Palestine based on the model constructed in "A Federal Constitution for the United Kingdom - An Alternative to Devolution" (Dartmouth/Ashgate, 1997) by M. A. Fazal.


According to Dicey " Federalism is a natural constitution for a body of states which desire union and do not desire unity " [ A.V.Dicey, Law of the Constitution (8th ed. 1915) p.lxxv]. That is to say, where a number of distinct peoples have separate national identities, their national aspirations can be met by having separate home governments of their own in their respective territories in regional matters but submitting themselves to a central or federal government in matters that are common ( e.g. defence, foreign affairs, currency etc.) to all the territories inhabited by those groups of population.The factors that have to be taken into account in determining whether a group of people constitute a 'nation' include geography, history, race, language, culture [ Royal Commission on the Constitution (1969-73) vol.1,chapter 10] and a sense of national identity. On the basis of these criteria, the Palestinians do constitute a nation . They seem to aspire to have a homeland of their own. IT IS NOT ACCEPTABLE TO THEM TO BE GOVERNED AS PARTS OF THE NEIGHBOURING ARAB COUNTRIES SUCH AS EGYPT AND JORDAN. For this reason, this option is ruled out. However, the existence of separate national identities of the Israelis and the Palestinians is compatible with the federal option.


Association of Israel, Palestine and Jordan.

An option for a loose form of association of Israel, Palestine and Jordan, sometimes referred to as a confederation but falling well short of the European Union model has been discussed in Israel as a possible solution. This could involve freedoms for easier travel (not amounting to freedom of movement in the EU law meaning a right to settle), of right to establish business in each other’s territory, joint development projects and possibly a co-ordination of foreign policies etc. Such a solution could provide opportunities for the expansion of Israeli business and industry in the Palestinian territory and Jordan and offer employment to the local people. It could open up the possibilities of further collaboration among the parties and enhance the prospects of economic development and ecological/environmental projects being undertaken. It has the potential for benefits provided (a) that there is sufficient political good will among the parties and (b) that the outstanding issues are satisfactorily resolved.

However, such good will would be dependent on uniform economic/ecological development of these three territories and comparable standard of living for their population. This is unlikely to occur if the Palestinian territory and Jordan remain largely desert and semi-desert and economically under-developed as compared with Israel. Furthermore, this option does not address itself to the central/core issue of the conflict viz. the future of the Palestinian refugees. If the refugees have to continue to live in the refugee camps (which provide the breeding grounds for the suicide bombers) where life is without hope and dignity, they will continue to pose threat to the peace and security of the area. The problem is aggravated by the continuing Israeli policy of acquiring compulsorily Palestinian land and demolishing their houses under the so-called land grab policy. According to press reports, Israel is now exploiting the security wall for the purpose of seizing lands from the Palestinian Arabs ( vide the Cabinet decision of July 2004 approving the land seizure using legislation from 1950 that allowed confiscation of Arab land without compensation). This has the effect of destroying political good will among the Palestinians towards Israel and of creating an atmosphere of intense hatred towards the Jews. As a result, realisation of such an option becomes a political impossibility.

It should be pointed out that the current initiative for a two-states solution launched by the US Government and others does not address itself to this core issue of the Palestinian refugees’ future either. This issue could be resolved satisfactorily only by re-settling the refugees in a way that provides opportunities for gainful economic employment (i.e. jobs and businesses), good housing, education and a comparable standard of living. That is to say, the Palestinians must have a life with dignity. Any option for a solution that does not address itself to the questions of how, when and where to settle the displaced Palestinians cannot be a viable proposition. THE WORLD IGNORES THE QUESTION OF THE PALESTINIAN REFUGEES’ FUTURE AT ITS PERIL. The federal option advocated below by this author seeks to deal with this and other relevant issues.


The two-states solution might not be realisable owing to the difference of perception as to the concept between the parties. Those Palestinians who are prepared to accept the two-states solution conceive of the proposed Palestinian state as a fully sovereign independent state equal to the powers and status of Israel. On the other hand Israel might have very different ideas about the Palestinian state far removed from the concept of equality between these two states. According to Israel the relation between the two would be that between a dominant state and a vassal state corresponding to that between a colonial power and a colony in many respects. Firstly while Israel would remain fully militarised and a nuclear power, the Palestinian state would have to be completely demilitarised and disarmed. Secondly Israel would want to be in a position to control the powers of the Palestinian state over foreign affairs including its treaty-making power. Thus a treaty of alliance between the Palestine state and Iran would be subject to veto by Israel. Thirdly while Israel would be rich and environmentally green, Palestine would be a poorer state comprising of semi-desert and arid zones. Fourthly Israel would accept no responsibility for the rehabilitation of the Palestinian refugees who will continue to live in the refugee camps where life is without hope providing breeding grounds for the suicide bombers. Indeed Israel will continue to have the power to acquire compulsorily Palestinian land and homes without compensation and expel them to the refugee camps. This is in sharp contrast to the position of the Jews in Europe where they claimed compensation not only from Germany but also from other countries. Thus their claims against Poland for compensation / restitution stand at £18 billion. The European Union and the rulings of the European Court of Human Rights are putting pressures on Poland to pay compensation to the Jews. In fact the Jews have received substantial compensation from Germany for the loss of their homes, properties and lives during the second world war. No such compensation has ever been paid or will be paid to the Palestinian refugees.
The question of the future of the Palestinian refugees is the central/core issue of the Israeli-Palestinian conflict. That issue remaining unresolved, the two-states formula cannot provide a viable solution to the problem. It is unlikely to be acceptable to the Palestinians or to Israel's neighbours as a durable basis for a solution to this conflict.

Israel under the two-state solution is perceived by the majority of Israelis as a Zionist State. In that case some fundamental questions need to be asked. Is there any room for equal treatment and non-discrimination between the Jewish and non-Jewish citizens of Israel? Is Zionism compatible with the concept of equal rights for all citizens? If not, will non-Jewish citizens [including the Arabs (20%) and 'others' (4% of the population)] be liable to be expelled from the country and have their homes and properties seized by the state for Jews? This is being currently (in 2007) discussed in Israel owing to possible higher growth of the non-Jewish population. COULD SUCH A ZIONIST STATE UNDER THE TWO-STATE SOLUTION PROVIDE A DURABLE BASIS FOR PEACE AND SECURITY BETWEEN ISRAEL AND THE PALESTINIANS AND BETWEEN ISRAEL AND ITS ARAB NEIGHBOURS?


The Government of Israel is reportedly considering drawing the boundaries of Israel unilaterally in the event of a negotiated solution with the Palestinian Authority not being realised, annexing the areas of the Palestine Territory with the main Jewish settlements while withdrawing from others. The Palestinians have made it clear unanimously that this is not acceptable to them. The question is whether such an option, not recognised by the Palestinians, nor by the neighbouring states, nor by the world at large could provide a basis for a durable solution particularly at a time when some of the countries in the region are trying to develop nuclear, biological and chemical weapons.THE RISK IS THAT INSTEAD OF PROVIDING A SOLUTION TO THE PROBLEM, IT MIGHT ADD A NEW DIMENSION TO THIS CONFLICT.



The main reason for the breakdown of the last peace talk in July 2000 was the demand for the return of the Palestinian refugees abroad. Israel felt that the effect would be to transform the country in such a way that the Jews would be in the minority and therefore could not accept it.

My perception is that the gist of the Palestinian demand is that the plight of the displaced Palestinians including in particular those in refugee camps ought to be addressed. If this means that the refugees need to be rehabilitated/resettled in Palestine (NOT NECESSARILY IN ISRAEL) with avenues for employment in agriculture, trade, industry, public services etc. with a good standard of living and opportunities for life with dignity, then I have sympathy for that view. INDEED THAT WOULD BE MY RECOMMENDATION AS PART OF THE PROPOSAL FOR A FEDERAL/CONFEDERAL SOLUTION TO THE PROBLEM. My recommendation is that in the main, Palestine, as one of the units of the proposed federation will absorb the Palestinian refugees by way of resettlement/rehabilitation, while Israel as the other unit of the same federation would be free to admit Jews from abroad for settlement. Emergence of these two units as prosperous entities side by side would lay the foundation of a durable federal state.

It is envisaged that Palestine will comprise territories of the pre-1967 borders with some adjustments. The position of Jerusalem is dealt with below separately.

The precise way in which my federal model would apply here is indicated by my article entitled "How to avoid nuclear war between India and Pakistan." This work seeks to apply the same model to the Indian sub-continent.

Under this federal proposal both Israel and Palestine as the units of the same federation will enjoy maximum autonomy/independence consistent with a federal structure, be members of the United Nations and other international organisations, and play a role in foreign affairs to the extent indicated in chapter six of this book. Since Palestine is likely to be economically a weaker partner of the federation there will be a special provision for its rapid advancement . The following statement at p. 131 in chapter 5 of the above book of mine could be substantially applied to the Israeli-Palestinain federal scheme:

"The resources for the development of Scotland and Ireland [ the economically backward units of the proposed United Kingdom Federation] will come from a fund of the 'Distributable pool' which will consist of the following items: (i) 75% of the total oil revenue - oil of the United Kingdom origin; (ii) a fixed percentage of taxes on natural gas and V.A.T.; (iii) borrowing on the security of shared taxes [ discussed in chapter 4 of this book entitled 'The Financial relations Between the Commonwealth and the States']; - borrowing to be repaid out of oil and gas revenue;(iv) receipts of [ charges ] on loans to enterprises financed by borrowing under (iii); (v) a fixed percentage of tax on land value in Scotland and Ireland ( which will go up rapidly as a result of the development of those Regions)".

Once such a solution has been agreed and arrived at, resources for building the necessary infrastructures could flow both from within and outside the newly created FEDERAL STATE OF ISRAEL AND PALESTINE (My proposal for the name to be given to the new state). However, I recognise that money is not the problem. The problem is: how to create the favorable political atmosphere in which negotiations for such a solution could commence. I believe that public discussion of constructive and positive ideas such as mine could create such an environment. The gravity of the situation on the ground certainly calls for full public debate of such ideas both within Israel and abroad, particularly, in the West.

The conflict between Israel and the Palestinians is assuming a new dimension. Of all the international conflicts this is potentially the most dangerous one which could pose a grave threat to international peace and security, not only to the countries of the Middle East, but also to the rest of the world involving us all in a nuclear holocaust. This is likely to happen if Russia gets involved in this dispute militarily. Russia is already involved in Iran in addition to its involvement with India militarily. This calls for urgent consideration and peaceful resolution of this dispute on the basis of JUSTICE AND FAIRNESS. My proposal for a federal solution to the problem is a step in that direction.

A possible choice between the two-states solution (i.e. one sovereign independent Israeli state and another sovereign independent Palestinian state) and a federal option falls to be considered. The two-states solution presents awkward problems some of which might be presented as follows:

1. The question will arise as to which state shall have jurisdiction over the holy sites of Jerusalem. Under the federal option the federal authorities comprising of both Israelis and the Palestinians will have this jurisdiction

2. The question of demilitarisation of the Palestinian State which will necessarily arise might be a tricky one and could be difficult to achieve in practice. The Palestinian State might demand similar limitations on the armament of Israel which the latter would be unable to concede so long as the threat to Israeli security from her Arab neighbours remains. Under the federal option this problem will simply disappear. The federating units will not be armed. It is only the federal state that will be armed for defensive purposes.

3. Under the two-states solution the question of Jewish settlements and their locations across the boundaries and the corresponding rights of the Palestinians to settle will present an enormous hurdle to overcome.

The ideal of a federal state is to confer on its citizens the right
(a) to move freely throughout its territory,
(b) to reside and settle in any part of the territory,
(c) to acquire, hold and dispose of property and
(d) to practise any profession or to carry on any occupation, trade or business (cf. Article 19 of the Constitution of India).

It is hoped that this principle could be eventually realised in the Federal State of Israel and Palestine. It might be necessary to proceed by stages in order to establish freedom of movement within the territory of the federal state, as was the case with the European Union.

Under the federal option, this being one country, the parties, it is hoped, will have a relaxed attitude on this issue, provided the security considerations are met

4. Under the two-states solution the capitals of both will be located in Jerusalem. If the relationship between these two states is tense that is likely to be reflected in the situation of Jerusalem itself involving clashes between the armed troops of the both sides. Under the federal option the federal capital can be located in Jerusalem while the capitals of the federating units can be located elsewhere.

The solution currently proposed by the United Nations, the USA and favoured by the parties to the conflict themselves seems to be the two-states formula i.e. one independent sovereign Israeli state and another equally independent sovereign Palestinian state. This is in contrast with the one federal state solution proposed by myself. The question is: Which of these solutions is desirable? The answer is that the two states-solution is a wrong prescription. At the present time there is one Israeli state and another half Palestinian state ruled by the Palestinian Authority. We are all aware of the kind of relationship that exists between them. If there are two sovereign independent states side by side each with powers over its armed forces and the media together with its propaganda machinery, the process will end in the creation of two Balkan states which will be ready to start a third world war in no time.This time the war is likely to be a nuclear war, either using their own nuclear weapons or by involving other nuclear powers such as the United States and Russia. Israel is already a nuclear power and is thought to possess more than two hundred nuclear warheads, each one being of two and a half times the size of the bomb that destroyed Hiroshima. The effect would be to plunge the world into a nuclear holocaust, hence the importance of finding a durable solution to this conflict.

However, to be durable, the solution must be just and fair – just and fair to the Palestinians, giving them a chance of life with dignity (particularly for those living in the miserable refugee camps from which most of the suicide bombers originate) and equally just and fair to the Israelis by guaranteeing them peace and security. In this conflict Israel might win militarily (though there is no guarantee that the balance of power in favour of Israel will never change) but it will not win peace without a just and fair settlement. As I see it, the only way to bring about that just and fair settlement is through the federal solution as proposed in this website article.

Much of the Palestinian land at present comprises desert and semi-desert areas. In the context of the proposed federal solution, the Regional Equalisation Principle will require greening of the desert/semi-desert lands involving afforestation, development of agriculture as well as all-round development including industry. As a result, the Palestinian unit of the proposed federation will be as attractive a place for settlement as Israel. Therefore the Palestinians returning from abroad as well as those living in the refugee camps will find Palestine a sufficiently attractive place for settlement. THERE WILL BO NO NEED FOR THEM TO SETTLE IN ISRAEL.Palestine coupled with a part of Sinai ( which will be equally transformed into green farm land and and forests) ceded to the proposed federation by Egypt for having its own part of Sinai turned into green farm land and forests ( by the proposed Federal State of Israel and Palestine aided by the outside world) will be adequate for settlement for the returning Palestinians.

For the answer to the question: 'where will the water come from for the greening of the Palestine Territory and the Sinai Desert' the reader is referred to this author's website article entitled "How to Avoid Nuclear War between India and Pakistan" (paragraphs headed: RESPONSE TO CHALLENGES OF GLOBAL WARMING, CLIMATE CHANGE AND ENERGY CRISIS). If the appropriate technology could be developed to transform solar heat into unlimited amount of energy at a cost that is commercially viable then sufficient number of desalination plants could be built along the sea coasts. Fresh water thus obtained from the sea through the use of desalination plants could be taken inland by way of irrigation canals and tunnels for the greening of both the Palestine Territory and the Sinai Desert.

Under the federal option the citizens will have a right to move freely throughout the territory of the federal state, to reside and settle in any part of the territory ,to acquire,hold and dispose of property in any area of the federation and to practise any profession or to carry on any occupation,trade business in any part of the country. The question naturally arises as to how the principle of freedom of movement could be realised in the proposed federation in view of the current Israeli objection to Palestinian settlement in Israel and the Palestinian objection to Jewish settlement within the Palestinian territory.


If the standard of living is sufficiently high and uniform throughout the territories of the proposed federation then the principle of freedom of movement (although available as a matter of constitutional right to the citizens of the federation) is not likely to cause a major movement of population in either direction between Israel and the Palestinian territory. THIS HAS BEEN PROVED TO BE THE CASE AMONG THE COUNTRIES OF WESTERN EUROPE OF THE EUROPEAN UNION. The objective of this federal proposal is to see that Israel remains predominantly Jewish and Palestine predominantly Palestinian in the composition of population. As a result the state power will remain in the hands of the Jews in Israel and in the hands of the Palestinians in Palestine respectively. The Jews and the Palestinians will share power at the federal level. THIS OBJECTIVE IS SOUGHT TO BE ENSURED BY THE OPERATION OF THE PRINCIPLE OF FREEDOM OF MOVEMENT WITHIN THE FRAMEWORK OF THE REGIONAL EQUALISATION POLICY AS ENUNCIATED BY THE THIS AUTHOR.

The European Union provides for freedom of movement for the E.U. nationals among its member states. However, if one unit of the federation remains under-developed as compared with another that is likely to encourage migration from the former to the latter. This explains the movement of the working population from the countries of Eastern Europe of the European Union to those of Western Europe. Such a trend would be fatal to the balance of the proposed federation as it could turn Israel into a Palestinian majority unit. As a consequence, the Palestinians would acquire the state power in both the units of the federation as well as at the federal level. That would have the effect of undermining the balanced structure of the federation as contemplated by this author.

This demonstrates the importance of acting on the regional equalisation principle in the implementation of this author's proposal for a federal solution to the Israeli-Palestinian conflict.


In view of the gravity of the situation created by the assassination of two Hamas leaders in 2004 which poses a threat to international peace and security and a drift away from the peace process towards a spiral of violence, it is necessary to articulate a process by which the search for a solution could return to a constructive path. As to the procedural steps, it is recommended that the parties withdraw from violence and return to the conference table. Previous attempts to do so have been frustrated by acts of violence committed by the parties. THE SPECIFIC RECOMMENDATION ON THE MATTER WOULD BE TO INVOLVE ALL THE PARTIES/GROUPS INCLUDING THOSE ENGAGED IN VIOLENCE IN THE NEGOTIATIONS AND DELIBERATION AT THE PROPOSED PEACE CONFERENCE. This means that the parties/ groups currently engaged in violence have to be invited to the proposed conference to make their input to the proposals for a possible resolution of the conflict. This is what this author had recommended for Northern Ireland in the following words in January 1993.

Almost endless rounds of talks between the British Government and the ‘constitutional parties’ in Northern Ireland seem to have got nowhere while violence continues ,increasingly affecting the mainland of Great Britain. It is submitted that any search for a settlement ought to have two objectives in view. First, the settlement, to be a durable solution, must be arrived at by way of broad consensus on both sides of the divide, i.e. the Protestants and Catholics. Secondly, the settlement must result in the restoration of peace and security both in Northern Ireland and on the mainland of Great Britain.”.

“These two objectives dictate that the consultation process ought to assume the form of a Round Table conference. To secure wide acceptance representatives from all sections of both the communities must be invited to attend. These would include not only the constitutional parties but also the churches on both sides and those engaged in violence. IT OUGHT TO BE APPRECIATED THAT THE CONSTITUTIONAL PARTIES ALONE CANNOT DELIVER A SETTLEMENT WHICH WOULD RESTORE PEACE AND SECURITY AND SECURE CONSENSUS ACROSS THE BOARD. FOR THIS REASON THE STIGMA ABOUT TALKING TO THE TERRORISTS HAS TO BE OVERCOME. Indeed it is only if the terrorists are able to play a part in the constitutional process that they are likely to abandon violence. The objective of restoring peace and security cannot be achieved without their participation in the process of settlement” [ M.A.Fazal, A Federal Constitution for the United Kingdom-An Alternative to Devolution, ( Dartmouth, 1997) p. 207].

The above statement applies fairly and squarely to the Israeli-Palestinian conflict. It must be abundantly clear by now to all concerned that the Palestinian Authority, the only constitutional party, on the Palestinian side alone cannot deliver a settlement which would restore peace and security in Israel and Palestine and secure consensus across the board. To secure wide acceptance from the Palestinian side, all sections of that community including those currently engaged in violence have to be represented at the proposed Round Table Conference. Acceptance of this procedural step is the most essential pre-requisite for the establishment of a durable peace in that region.



Head of State

Since the object of this proposal for a confederation is power-sharing amongst the federating units, the institution of the head of state and its powers ought to be considered in this context. The proposition that the office of the president ought to rotate amongst the units of the federation/confederation in turn amongst Israel and Palestine respectively is recommended for adoption.

As regards the powers of the president, this could be either symbolic or substantial. If the US model of the presidential system of government is adopted, the president’s powers would be substantial. If, on the other hand, the British system of parliamentary government is chosen, the powers of the head of state would merely be symbolic. The cabinet with its prime minister would be the holder of real power in the state. The cabinet would be answerable to the lower house of the federal parliament which may be dominated by the largest federating unit. Such a position is likely to be inconsistent with the objective of “power-sharing” among the federating units. For this reason, this author’s preferred option for recommendation for the federal government would be the US model of the presidential system of government rather than the British model of parliamentary system of government. The US model would provide for greater power-sharing (among the federating units) if the office of the president is held by each of them in turn.

However, the state/provincial government and parliament under the proposed federation as distinct from the federal government and parliament could be based on the British system of parliamentary government as this would not detract from the principle of power-sharing at the federal level.


The Upper House of the Proposed Federal/Confederal Parliament




The strategy behind this model for the upper house is two-fold.  First, the countries constituting the proposed confederation ought to retain much of their current independence at the state level.  Secondly, they should all have a meaningful share of power at the centre.  This objective is the guiding consideration behind the formulation of the detailed proposals for (a) composition, (b) powers and (c) for devising machinery for the resolution of deadlocks/disputes between the lower and the upper houses of the confederal/federal parliament.  A federation normally comprises large and small states, the latter being apprehensive of domination by the former.  As a consequence, the second chamber is so designed as to be able to protect the interest of the weaker states as against the stronger states.


Composition of the Upper House


The question of composition involves two issues, viz. (1) distribution of seats i.e. how many seats each of the territories comprising the federation ought to have in the upper house of the federal parliament. (2) Representation of the territorial units in the upper chamber.  On the first point, since some states are likely to be more populous than others, a compromise is called for.  Thus the US model gives two seats in the Senate to each State in the USA irrespective of population so that small states are not swamped in a parliament elected on the basis of population.  In Germany, on the other hand, the compromise formula gives neither equal representation to states, nor is it strictly based on population.  Thus Art.  51 of the German Constitution provides,


“(1) The Bundesrat [the upper house] consists of members of the Länder [states] governments which appoint and recall them.  Other members of such governments may act as substitutes.”


(2) Each Land has at least three votes; Länder with more than two million inhabitants have four, Länder with more than seven million inhabitants six votes.


(3) Each Land may delegate as many members as it has votes.  The votes of each Land may be cast only as block vote and only by members present or their substitutes.”


The effect of the Art. 51 formula might be that larger states are under-represented (e.g. the state of North Rhine Westphalia have almost thirty times the population of Bremen, but has only double the number of Bundesrat seats), but it provides a strong voice for the small states or under-populated areas.  Therefore, the German model is recommended for adoption for the proposed confederation.  However, weighted voting for the countries constituting the confederation (as distinct from the federating units such as the states in India) might deserve consideration. 


In the European Union the Council of Ministers is represented by the Member States on the basis of weighted voting.  Where the Council is required to act by qualified majority voting, the votes of its members are weighted as follows:

Belgium   5
Denmark                      3
Germany                      10
Greece                         5
Spain                            8
France                          10
Ireland                          3
Italy   10
Luxembourg  2
Netherlands 5
Austria 4
Portugal  5
Finland 3
Sweden 4
United Kingdom 10


(EU Treaty, Art 205(2))


Representation in the European Parliament is weighted as follows:


Belgium   25
Denmark                      16
Germany                      99
Greece                         25
Spain                            64
France                          87
Ireland                          15
Italy   87
Luxembourg  6
Netherlands 31
Austria 21
Portugal  25
Finland 16
Sweden 22
United Kingdom 87

(EU Treaty, Art 190(2))


In our model, the Council of Ministers and the European Parliament of the European Union ought to be perceived as comparable to the upper and lower houses of the proposed confederation.

The population of the Palestine territory is 3.8 million. ( This is the Palestine Authority's figure which is disputed by some who say that the true figure is likely to be 2.4 million). There are more than 7 million Palestinian refugees,many living abroad. Israel's population is 6.78 million, 81% of which are Jewish (5,180,000) while 19% are Arab.Since 1990 the Jewish population has grown by 2.5% a year,only a fraction below the growth rate in the West Bank.
If one applies the formula contained in Article 51(2) of the German Constitution to the proposed Federal State of Israel and Palestine, this is likely to produce a federal upper house of 12 members,Israel and Palestine,each having 6 votes. Equality of of votes between these two polarised units of the federation could be a source of frequent constitutional deadlocks.

On the second issue the territorial representation of the federating units in the upper chamber may be achieved through either  (a) governments of the states e.g. through appointment by the state governments as in Germany or (b) state assemblies as in India or (c) the people i.e. direct election as in the USA or Switzerland. Election of the upper house by the state assemblies or by the voters might make the chamber democratically accountable but the elected members have no automatic connection with the state government of the area they represent; nor do they provide any meaningful link between the upper house of the federal parliament and the respective state assemblies.


We have stated at the outset that our guiding consideration is to ensure that the countries constituting the proposed confederation must have a meaningful share of power at the centre. This consideration dictates that we should adopt the German model i.e. representation of state governments to constitute the upper house. The German Parliament is the only example in the world where the upper house is entirely composed of members of the government of the federating states. The German Bundesrat is said “to be closest comparator to the European Council of Ministers. There are considerable advantages associated with such a system:[a] It creates a real institutional link between the states and the centre…[b] It makes intergovernmental relations transparent …[c] It genuinely binds regional and national concerns together. Because state governments can scrutinise national policy  and because they bring their own policy concerns to the table, this fosters a better understanding between the states and the centre and allows joint strategies to be developed. It may even result in territorial governments being prepared to effectively ‘pool’ their powers to legislate upwards – since they have an opportunity through the upper house to influence national legislation” [Meg Russell Representing the Nations & Regions in a New Upper House (1999,The Constitutional Unit , UCL,) p.13 ].


However, we are not advocating a wholesale adoption of the practices and procedure  of the German Bundesrat (i.e. the upper house) . It has been said that “the German Bundesrat is not a parliamentary chamber in the usual sense of the term.  It meets only once every six weeks, for a session which generally lasts around half a day.  There are no lengthy debates in plenary sessions, with much negotiation going on in committee.  Instead plenary sessions, which are generally poorly attended, are quick and efficient events where positions negotiated in committee are formally voted on. Meanwhile the committees themselves are attended almost exclusively by civil servants, who deputise for ministers” (Meg Russell, op. cit. 13-14).


We envisage the upper house of the proposed confederation to be a full scale legislative chamber.



Powers of the Upper House


In true federal systems (as opposed to quasi-federal ones) the upper chamber tends to be more powerful. Thus in the USA bills are introduced in either house but the Senate can amend or veto any legislation including financial legislation (although finance bills have to be introduced in the lower house). Constitutional amendments have to be passed by a 2/3 majority in both houses. In addition the Senate has powers to approve executive appointments, ratify treaties, declare war etc.


In Germany  the upper house has the opportunity to see and comment on all the bills before their introduction in the lower house. Constitutional amendments have to be passed by a 2/3 majority in both houses of the federal parliament.


The upper house of the federal parliament in Germany has an absolute veto on all bills affecting the jurisdiction of the states – around 60 per cent of bills. This is because the states administer most federal laws. One commentator has said “ The German Bundesrat is successful at binding the states and the national parliament together because of the particular nature of  German federalism . Whilst most policy is decided in outline at national level ,the implementation of  this policy and consideration of its detail ,goes on in the Länder (i.e. the states). The Länder are the mechanism for implementation of government policy  and thus central to decision-making. This is reflected in their powers in the Bundesrat ,where they have an absolute veto on all bills affecting their work –around 60 per cent of legislation. This includes most financial legislation. The existence of two categories of legislation in Germany and the power of the Bundesrat veto over one of them, further strengthens the institution and the links between national and state levels. If the powers of the Bundesrat were not so considerable ,it would not be able to maintain the involvement of senior government ministers from the Länder. This would not be  feasible if, for example, the upper house had only the power to delay legislation … If a chamber is to function effectively as a territorial upper house …it must be given some genuine powers over territorial issues [i.e. issues affecting the states] (Meg Russell, op. cit. 14)


 In Germany the upper house is decisive on European matters  affecting the states in addition to its role in electing the judges of the federal Constitutional Court  and for ‘state of defence’. The above  consideration ought to be borne in mind  in prescribing the powers of the upper house in our proposed confederation.


Resolution of Disputes between the Upper and Lower Houses


In devising an appropriate procedure/machinery  to resolve disputes between the houses of parliament we will be guided by our starting premises viz. 1. that the countries constituting the proposed confederation ought to be able to safeguard their allocated sphere of  independence/ autonomy and 2. that they should have a real share of power at the centre. The  possible options  for such procedure/machinery are as follows.


A.  The ‘suspensive veto’ as exercised by  the British House of Lords.  It merely interposes a delay  between the introduction of a bill and its final passage into law. Ultimately the will of the House of Commons which is elected on the basis of population  prevails. In the context of our proposed federal framework this will not provide the necessary checks   and balance as envisaged. Therefore this option is ruled out.


B. The endless shuttle  of bills between the two houses as experienced in Australia. This is also unsatisfactory. The process could only end by dissolving both houses of parliament.


C. Joint sitting of two houses of parliament. This is used  in India. The objection to this device in  a federal context  is that under this procedure the will of the lower house which is generally elected on the basis of population will prevail as its members are likely to be more numerous. Under this system the smaller states cannot possibly safeguard their position against the more populous states.



D. Joint  committee of both houses of parliament. This procedure is used in Germany and the USA. It is thought to be more productive than other devices. “Taking discussion off the floor of the house is likely to create a more constructive and less confrontational atmosphere in which to negotiate” [Meg Russell, Second Chambers: Resolving Deadlock  (The Constitution Unit, UCL, 1999) p. 5 ].  However, as Meg Russell states in the paper cited here  adoption of this device calls for  consideration of the following questions.



1. Who can call the joint committee ?


In Germany the request will generally come from the upper house if they receive a bill they cannot agree with. However, the request may also come from the lower house or government  in response to an upper house veto. Whoever requests all the parties are bound to co-operate. The German procedure is to be recommended as it provides the opportunity to all the parties involved to initiate the process.



2. Who are the members of the joint committee ?


In Germany the upper house is composed of  the members of the states. One member  from each of    the 16  states is represented on the committee. These will be senior members of the state governments. Considering the fact that the consent of the upper house is required to a bill where the state jurisdiction is involved  ( and Bundesrat will have a veto over such a bill) this is a satisfactory way of  safeguarding the states’ interests even at the committee stage of a bill and is therefore recommended.



3. Ad hoc or permanent committee


In Germany a permanent committee is set up at the start of each parliamentary session, comprising of senior figures (as in the USA). Because it consists of senior figures  its recommendations are likely to be weighty  and therefore acceptable. Being a permanent committee its members are likely to develop trust and co-operation (which is less likely on ad hoc committees). For this reason permanent committee is recommended.



4. What can the joint committee discuss ?


In the USA the committee is limited to the specific clauses of the bill which are in dispute. In Germany the committee’s remit is somewhat wider. It is restricted only to matters which are specified in the motion to convene it. This might permit the committee to add a new clause not previously covered by bill.. The German Constitutional Court ruled in 1986  that this was permissible but that it was ‘close to the limit of  the legally acceptable’. Nonetheless the German procedure provides for flexibility and is recommended.



5. How is the joint committee decision taken ?


In the USA the groups representing the two houses vote as blocks with one vote each, agreement depending on a majority among representatives of each house. The decision is very often a compromise between the parties.


In Germany the decision is taken by a majority of votes of committee members. Here the decision is a compromise among the states.  In the joint committee the states have one representative each  but in the upper house the states have different number of  votes. The committee have to take this fact into account.


On our approach it is the interests of the states rather than of the parties that matter most and consequently the decisions have to reflect a compromise among the states. For this reason the German model is recommended.



6. Can  joint committee proposals be amended by the house?


In the USA and Germany the committees’ proposals may not be amended by either house when they are discussed in the house, unless the committee itself recommends otherwise.  It is submitted that this position is preferable in the interest of the integrity and status of the committee.



7. Who has the last word?


In Germany there are two classes of bills – (1) The upper house has a veto on bills that affect the jurisdiction of the states. (2) On the remaining bills the lower house has the last word.  On a bill that is subject to veto by the upper house, once the committee has been called (a committee may be called on any bill where the houses disagree either by the lower house or by the federal government or by the upper house), its recommendations must be accepted or else the bill dies. 


In the USA all legislation must be agreed by both houses.  The recommendations of the joint committees are subject to the same rule.  Failure to agree results in the death of the bill or in another committee being called. 


It is submitted that the German procedure of joint committee (in which each of the sixteen states are represented by one vote) provides a far more effective voice for the states and is recommended for adoption.


Overall the objectives of maximum independence/autonomy for the countries joining the confederation and their having a significant share of power at the centre are better served by the adoption of the German model for the upper house than any other in existence.  For this reason, the German model is recommended for adoption subject to the modifications noted above. 


Machinery and Model for the Removal of Regional Disparity


Maintenance of integrity and unity of a federation requires measures to maintain a comparable standard of living, employment opportunities and economic development throughout the country.  Relative backwardness of some states compared with others tend to set in process disintegrating forces.  This is why Pakistan was dismembered owing to the fact that East Pakistan was perceived to be at a disadvantage economically.  This is also recognised by the European Union where Art 158 of the Treaty provides,


“In order to provide overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion.  In particular, the Community shall aim at reducing disparities between the levels of development of the various regions and backwardness of the least favoured regions or islands including rural areas.”


Art. 263 has established the Committee of the Regions where the Member States are represented as follows: 


Belgium   12
Denmark                      9
Germany                      24
Greece                         12
Spain                            21
France                          24
Ireland                          9
Italy   24
Luxembourg  6
Netherlands 12
Austria 12
Portugal  12
Finland 9
Sweden 12
United Kingdom 24


Art. 265 has imposed a mandatory duty on the Council of Minister and the European Commission to consult the committee of the Regions “where the Treaty provides and in all other cases”.


Model for Development of Regional Parity


In his answer to the questionnaire (q. 5.6.) issued by the Commission on Centre-State Relations in India as to whether a special federal fund for ensuring ‘faster development in economically backward areas relative to other developed areas of the country’ is necessary, this author suggested a model for development in the following terms:


“I have indicated … that such a fund is clearly necessary in the case of India.  It could be funded by taxes on petrol, gas or other forms of energy, or alternatively on consumption of good and services.  The Finance Commission is not the appropriate body to administer such a fund which would involve regional planning.  It has got to be the planning commission acting in collaboration with the state governments concerned.  The strategy would be first to develop the economic infrastructure.  When that is done, a balanced development – balanced between the urban and rural sectors – would be aimed at.  This would be an all-round development of the villages involving an integration of trade, industry and agriculture coupled with the restoration of ecological balance and afforestation as a part of soil and environmental conservation measures.  Elimination of the distinction between the town and the villages in terms of amenities and economic activities ought to be set as the objectives.  It is submitted that each Thana [the size of a police area in the British- ruled Bengal] should be taken as a unit of development.  This model roughly corresponds to, but is not identical with the commune system in China.  It is designed to prevent drift to the cities and deprivation of rural areas.”


“The upsurge in the Third World urban population has overwhelmed resources.  Sprawling slums, massive traffic jams, chronic unemployment, breakdown of essential services etc. are causing communal tensions (as happened in Bombay and Hydrabad in 1984).  In 1984 the population of Delhi, Karachi and Calcutta is estimated to be 7 million, 7 million and 11 million respectively.  By the year 2025, the population projection of these cities is expected to be 20-30 million each.  The development that I am advocating here i.e. a balanced development between the rural and urban sectors is designed to stop the drift to the towns and avoid the urban explosion.”


[M A Fazal, A Federal Constitution for the United Kingdom – An Alternative to Devolution (1997, Dartmouth/Ashgate) pp. 256-257]


It is submitted that appropriate machinery and model for the removal of regional disparity is crucial to ensure the success of the proposed confederation.



The model for our proposed confederation/federation is one of maximum decentralisation. It is likely that regional disparities among its constituent units of such a federation would be significant. As stated above, marked regional disparities among the constituent units are fatal to the integrity of a federation. The states will compete with each other in order to attract business and industry. To be able to do that successfully they must have the necessary infrastructure and be in a position to supply quality services. This calls for the incorporation of the appropriate equalising mechanism.

The equalising principles devised to cement the unity of a federation are of two types:
1. Regional Equalisation designed to achieve broadly uniform economic development and uniform standard of living throughout the territories of a federation; and
2. Fiscal Equalisation.

Article 104a (4) of the German Constitution reflects the concept of the first type by stating that the Federation may grant the Länder (the States) financial assistance for particularly important investments by the Länder or communes or association of communes, provided that such investments are necessary to avert a disturbance of the overall economic equilibrium or to equalise differences of economic capacities within the federal territory or to promote economic growth.

Regional Equalisation.

The principles of regional equalisation are embodied in the provisions of the Treaty of the European Union. Thus Articles 2 and 3 of the Treaty state that one of its tasks is to "promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social cohesion, […] the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States". Title XVII of the Treaty headed: Economic and Social Cohesion develops this concept further. Thus Article 158 states that "[i]n order to promote its overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion. In particular, the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including the rural areas".

In addition to permitting Member states of the Union to grant aids to achieve regional parity under Article 87 [see for instance, Preussent Elektra v. Schleswag (2001) All E.R. (EC) 330 containing a ruling of the European Court of Justice on the interpretation of Article 87] the Treaty provides by Article 159.

"Member States shall conduct their economic policies and shall coordinate them in such a way as, in addition, to attain the objectives set out in 158. The formulation and implementation of the Community's policies and actions and the implementation of the internal market shall take into account the objectives set out in Article 158 and shall contribute to their achievement. The Community shall also support the achievement of these objectives by the action it takes through the Structural Funds (European Agricultural Guidance and Guarantee Fund, Guidance Section; European Social Fund; European Regional Development Fund), the European Investment Bank and the other existing financial instruments".

Article 160 states that "[t]he European Regional Development Fund is intended to help redress the main regional imbalances in the Community through participation in the development and structural adjustment of regions whose development is lagging behind and in the conversion of declining industrial regions".

Article 161 authorised the setting up of a Cohesion Fund to provide a financial contribution to projects in the fields of environment and trans-European networks in the area of transport infrastructure.

Therefore the measures to deal with regional disparities are undertaken at two levels:
1. The EU financial assistance provided via the Structural Funds and 2. regional aids granted at national levels by the national governments in conformity with the law of the European Union. The reform of the Structural Funds in 1988 gave rise to four Funds: the European Regional Development Fund ( ERDT) to finance infrastructure, productive investment to create jobs, local development projects and assistance to small and medium-sized firms, the European Social Fund (ESF), to help the workforce adapt to changes in the labour market and help the unemployed and other disadvantaged groups to get back to work, in particular by funding training and recruitment schemes, the European Agricultural Guidance and Guarantee Fund (EAGGF) to finance rural development measures and assistance to farmers, mainly in regions whose development is lagging behind, but also under the common agricultural policy of the EU and the Financial Instrument for Fisheries Guidance (FIFG) to finance structural reform in the fisheries sector. Further EU assistance is provided by other institutions such as the European Investment Bank.

The Structural Funds are used to provide the EU financial assistance to regions and groups in need of assistance. They are based on the following seven objectives set out in the "Framework" Regulation 2052/88 [substantially amended by Regulation 2081/93 and by the decision of the Council of the European Union of 1 January 1995 adjusting instruments concerning the accession of the new Member States to the EU: (1995) O.J. L1/1. The latter added Objective No.6]:

Objective 1 - To assist regions whose development is lagging behind.

Objective 2 - to revitalise regions affected by serious industrial decline,

Objective 3 - to combat long term un-employment,

Objective 4 - to integrate young people in the labour,

Objective 5a - to adjust agricultural schemes,

Objective 5b - to develop rural areas,

Objective 6 - to promote the development and structural adjustment of regions with an extremely low population density.

As a result of the EU Regional Equalisation Policy, average per capita income in the three least prosperous countries (Greece, Portugal and Spain) increased from 68% of the Community average to 79% in 1999.

Therefore I would recommend the incorporation of the EU objectives into the laws and the constitution of the proposed confederation/federation with the emphasis on the overall uniform economic development of its constituent units and the aim of realising uniform standard of living throughout all the territories.

Much of the Palestinian land at present comprises desert and semi-desert areas. In the context of the proposed federal solution, the Regional Equalisation Principle will require greening of the desert/semi-desert lands involving afforestation, development of agriculture as well as all-round development including industry. As a result, the Palestinian unit of the proposed federation will be as attractive a place for settlement as Israel. Therefore the Palestinians returning from abroad as well as those living in the refugee camps will find Palestine a sufficiently attractive place for settlement. THERE WILL BO NO NEED FOR THEM TO SETTLE IN ISRAEL. Palestine coupled with a part of Sinai ( which will be equally transformed into green farm land and forests) ceded to the proposed federation by Egypt for having its own part of Sinai turned into green farm land and forests ( by the proposed Federal State of Israel and Palestine aided by the outside world) will be adequate for settlement for the returning Palestinians.

Fiscal Equalisation

The principle of fiscal equalisation seeks to deal with two types of fiscal imbalances (i.e. the gap between the revenue capacity and the expenditure responsibility): 1. Vertical Fiscal Imbalance and 2. Horizontal Fiscal Imbalance. Vertical fiscal imbalance is said to arise where the revenue capacity of a level of government cannot match its expenditure responsibilities. Generally vertical fiscal imbalance is in favour of the federal government and against the state or regional government (as in Australia). Indeed it is unwise and can be dangerous to invest the centre with too many constitutional responsibilities and too few taxes and resources. This is what was done in Germany under the Weimar Constitution with disastrous consequences. The federal government was forced to cover its budget deficit by issuing debts resulting in hyper-inflation. That in turn caused the rise of the Third Reich which brought about the Second World War [Carsten Hefeker," The Agony of Central Power: Fiscal Federalism in the German Reich" (2001) 5 European Review of Economic History 119-142]. It is equally undesirable to endow regional/state governments with power to issue debt without appropriate constitutional safeguards.

Horizontal fiscal imbalance arises among the constituent units of a federation because of (a) differences in the costs of providing equivalent services in the individual states and (b) differences in their capacities to raise their own-source revenues.

The statement of the principle of fiscal equalisation adopted by the Commonwealth Grants Commission in Australia [an independent body established in 1933 that advises the federal government on (i) fiscal equalisation and (ii) distribution of funds for programme to assist the indigenous population - Commonwealth Grants Commission -Annual Report : 2000-01, p.7 ] is that,

"State governments should receive funding from the Commonwealth (i.e. the Federation) such that if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each would have the capacity to provide services at the same standard" [Commonwealth Grants Commission, Report on General Grants Relativities 1999, Volume 1, Main Report, p.4].

The principle is intended to ensure that each State Government has the financial capacity to provide the same level of service to its residents. In using the principle to calculate relativities the Commission takes into account differences among the States in (i) their per capita capacities to raise revenues; (ii) the per capita amount they would spend if they were to provide the average level of services; and (iii) their per capita receipts of SPPs [ Specific Purpose Payments-40% of the total federal transfers to the States in 2001: Commonwealth Grants Commission : Report on State Revenue Sharing Relativities: 2002 Update, p.5].

The methods used to calculate these differences involve (1) the preparation of the FINANCIAL STANDARDS (the per capita average of total State expenditure or revenue for each function), (2) the STANDARD BUDGET (the collection of all the expenditure and revenue categories and then calculating (i) for each State service, the per capita expenditure each State would require if it were to provide the average level of service and (ii) for each source of State revenue, the per capita revenue each State would raise if it applied the Australian average revenue raising effort to its revenue base; (3) EXPENDITURE ASSESSMENT methods (to adjust the standard expenditures to allow for influences beyond the control of individual States that require a State to spend more or less per capita than others to provide the average standard of service to arrive at the state's cost of service provision. The influences thus recognised would relate to characteristics of State population or physical and economic environment because these would influence the State's costs in providing services.). (4) REVENUE ASSESSMENT methods (to take account of the influences beyond a State's control that would result in it raising more (or less) revenue per capita than other States if it applied Australian average rates of tax to its tax bases. Tax bases are generally measured using the value of transactions in each State that would be taxed under the average tax policy).

A State's per capita requirement for a share of the pool of funds available for distribution in each assessment year is then calculated as follows:

(5) CALCULATION OF PER CAPITA RELATIVITIES i.e. the measures of relative needs used to distribute the GST (Goods and Services Tax) and HCG (Health Care Grants). The final phase of the process is to use the assessments for the past five years to calculate per capita relativities to apply in the future. Each State's relativity is the average of its per capita requirements for a share of the pool in each of the five past years.

In 2001-02, about $2150 million (equivalent to 6% of the total GST/HCG pool and budget balancing assistance) was required to bring the financial capacities of those States with below average capacities up to the average (to meet their aggregate needs) [Commonwealth Grants Commission: Report on State Revenue Sharing Relativities 2002 Update, pp.4 - 7].

On 1 July 2000 major reforms reflecting the Inter-governmental Agreement on the reform of the Commonwealth-State Relations (IGA 1999) came into force: A New Tax System (Commonwealth-State Financial Arrangements) Act 1999. Under this provision the Commonwealth introduced a broad-based consumption tax called the Goods and Services Tax (GST). The 1999 Agreement specifies that the distribution of the GST revenue among the States will be based on horizontal equalisation principles - per capita relativities recommended by the Commonwealth Grant Commission as explained above. It also commits the Commonwealth to provide additional assistance (known as ' budget balancing assistance') during the transitional years prior to the abolition of some State taxes and imposition of additional expenditure responsibilities on the States (to ensure that no State will be worse off than it would have been, had the tax reforms not been implemented).

Horizontal Equalisation

The States' revenue capacity can vary significantly, thereby affecting their capacity to provide services of the national average. The principle of horizontal equalisation seeks to remedy this defect. Thus Mitchell Sharp, the federal finance minister of Canada said in 1966

"The fiscal arrangements should, through a system of equalisation grants, enable each province to provide an adequate level of public services without resort to rates of taxation substantially higher than those of other provinces" [ Canada, Federal-Provincial Tax Structure Committee, Proceedings of a meeting held in Ottawa, September 14-15,1966 (Ottawa, Queen's Printer,1966), 14].

The above statement was explained as follows: It would provide that any province in which average provincial tax rates (not its own tax rates) would yield less revenue per capita than the yield in Canada as a whole would be entitled to an equalisation payment. However, changes in energy supplies and values in the 1970s and 1980s resulted in the sudden shift in the relative positions of provinces in Canada that produced oil and provinces that consumed it. This had effect on the equalisation formula. The automatic response of the equalisation formula to the increases in provincial oil revenues was to increase the entitlements of the recipient provinces. Thus the federal government faced the prospect that one of its major spending programmes would escalate uncontrollably [David B.Perry, Financing the Canadian Federation, 1867 to 1995: Setting the Stage for Change (Canadian Tax Foundation, 1997),,pp.124 and 133.]. This called for a review of the equalisation formula in the light of developments.

In Australia the Intergovernmental Agreement (signed on 1 July 1999) provides that the interstate distribution of the GST will be based on per capita relativities determined by the Commonwealth Grants Commission. At the first meeting of the Ministerial Council for Commonwealth-State Financial Relations (established under the IGA 1999) held on 30 March 2001, New South Wales and Victoria complained that they received much less than equal per capita share of funding under the HFE (Horizontal Fiscal Equalisation) relativities determined by the CGC. The problem is that while vertical imbalance is reduced significantly (in the absence of equalisation arrangements) by equal per capita payments to the States or payments in proportion to the tax collected in each State, horizontal equalisation is achieved best by payments or grants that take accounts of differences in costs of providing services and revenue capacities. However, payments or grants to the States on the latter basis would result in unequal per capita amounts. Nonetheless formula-based approaches implemented by an independent institution are preferable to political negotiations as mechanism for the equalisation process.

Elaborate equalisation mechanism exists also in the German federal system. In view of the fact that income taxes are shared between the federal and state governments in fixed proportion (50% going to the federation and 50% to the states) the vertical fiscal balance is achieved in Germany mainly by varying the V.A.T. This is done by federal legislation which requires the consent of the Bundesrat (the upper house of the German Parliament: Article 106 of the Constitution). Vertical equalisation was last revised in 1992 when the Eastern states were included in intergovernmental fiscal arrangements (taking effect in 1996). As a result, the states' shares of the V.A.T. have increased reflecting the need of the Eastern states to reach parity with their Western counterparts. At present the federal share of the V.A.T. stands at 50.5 percent.

Horizontal fiscal balance is achieved in three steps.

1. The regional apportionment of the V.A.T. Three quarters of the states' shares are apportioned on the basis of population. Another quarter is reserved for the states considered to be "financially weak". They receive supplementary transfers from the V.A.T. to bring their fiscal potential to per capita up to 92 percent of the average.

2. An interregional redistribution scheme. The 'rich' states compensate the 'poor' states through financial transfers. This is also done on the basis of federal legislation which requires the consent of the Bundesrat, "due account being taken of the financial capacity" (i.e. the taxable capacity) of the states and not of the specific burdens (Article 107(2) of the German Constitution (Grundgesetz). The German Constitutional Court in its ruling of 11 November 1999 emphasised that the Constitution requires the federal Parliament to take measures to equalise the differences in the financial capacity of the states. This refers to actual financial resources and not to a relationship between revenue and specific expenditure needs. It is different from the equalisation practices of Australia. The interstate equalising transfer is unique to Germany and does not exist anywhere in the Commonwealth or elsewhere.

3. Supplementary Grants. Thus Article 107(2) of the German Constitution states that the above mentioned federal statute may also provide for grants to be made by the Federation from federal funds to financially weak Länder in order to complement the coverage of their general financial requirements. Such transfers have been widely used after unification of Germany. In particular "gap filling" grants have been introduced that guarantee at least 99.5 percent of the average fiscal capacity for all states. Furthermore, nine states out of sixteen receive federal grants to relieve the costs of "political management" and the new Eastern states (as well as some Western counterparts) receive federal grants in compensation for "special burdens" [Paul Bernd Spahn," The German Constitutional Court takes on the principle of 'solidarity' ( Federations, vol.1, number 1, March 2001)].

The German equalisation system seeks to achieve what is known in Europe as "interregional solidarity". However, recently it has come under criticism from some of the rich states. Thus in the above mentioned case of 1999 three Southern states (Baden-Wurttemberg, Bavaria and Hessen) mounted a challenge before the Federal Constitutional Court against the system of intergovernmental fiscal arrangements. They complained that it redistributes wealth to an excessive degree and creates negative incentives. In fact they wanted to replace it with 'competitive federalism'. Up to a point the challenge succeeded. The Court was particularly critical of the federal equalising grants. At present these have a strong equalising effect (99.5% of the state average for all states). As a result the federal government will have to reduce the number of grants as well as their magnitude.

On horizontal equalisation according to the Court, the Constitution mandates that population be adopted as the sole criterion for distributing resources among the states as opposed to an approach based on needs as in Australia. I have some sympathy with this approach of the Federal Constitutional Court. It is much more difficult to establish objective "needs criteria" than population as a criterion even among entities with comparable responsibilities at sub-national levels, let alone those between governments at national and sub-national levels where there may not always be comparable responsibilities. As for instance, defence is a major national responsibility but it is absent at sub-national levels.

On vertical equalisation the Court ruled that the Constitution demands a definition of 'necessary expenditures' at each level of government and 'a fair compensation' among jurisdictions on the basis of objective statistical data and medium term planning. The Court criticised the existing practice of weighting population as a method to express burdens in the case of the city states. The Court called for a scientific procedure of balancing, based on accurate data. However, the federal government wants to retain the weighting in the case of the city states (such as Berlin). There are some positive elements in the ruling of the Court. However, it will require a fundamental review of the existing German equalisation law.

Meanwhile political pressures are also building up for the introduction of competitive rather than co-financing federalism in Germany. Under the Solidarity Pact 11 signed on 23 June 2001 between the Federation and the States the financial support for East German Länder will end in 2019. Moreover, the reform of the German system of co-financing as a whole has been scheduled for 2004, the year of the next European Intergovernmental Conference which will decide upon a delimitation of powers within the European Union. Within the European legal framework Länder and regions have become competitors in attracting investments. The national state such Germany is losing its capacity to protect those Länder which are less successful. Therefore, the progress of European integration is pushing federal reform in Germany forward.

However, the system of fiscal equalisation has its rationale. Its rationality lies in the maintenance of uniformity of living conditions and the provision of comparable public services throughout the territories of the federation. Any departure from the equalisation principle will carry with it the risk of disturbing the social cohesion and solidarity and a threat to the integrity of the country. Therefore the decision-makers would be well-advised to bear this warning in mind.


There are two financial institutions in India which were designed primarily to deal with the issue of vertical fiscal imbalance between the centre (technically known as the Union) and the States, and, to a lesser extent, with that of the horizontal fiscal imbalance. The first is the quinquennial Finance Commission set up under the Constitution (Article 280). The task of the Finance Commission is to make recommendations to the Union Government on the following: (1) the distribution of the net proceeds of the specified taxes (income tax, federal excise tax etc.) between the Union and the States; (2) the principles governing the Union grants-in-aid to the various States (the resource poor States); (3) the transfer to the States needed to supplement the resources of the Panchayats (local rural self-government institutions) and the Municipalities (urban local self-government institutions). Up to 1978 the two criteria used as the basis of distribution were the contribution of each State to revenues (between 10 and 20 percent) and population (80 and 90 percent). Since then two further criteria have been added. These are the per capita income of each State (adopted in 1978) and a complex of backwardness including population of scheduled castes and tribes and the number of agricultural labourers (introduced in 1989). At the time of the Tenth Finance Commission covering the period 1995-2000 formula for distribution of the States' share of income taxes were as follows: 20% according to population, 60% on the basis of per capita income, 5% in relation to economic and rural infrastructure needs and 10% in relation to tax effort. Somewhat similar complex formula was also prescribed for distribution of the States' share of the federal excise duties. Thus population as the dominant criterion for distribution of resources has been somewhat downgraded.

Another financial institution is the Planning Commission, an agency of the federal government which recommends assistance to the States by way of grants and loans in support of various schemes coming under the Five Year Plan Programmes for poverty alleviation, employment generation and specific development projects. The Planning Commission acts on criteria such as 'special category States' (all the seven States in the Northeast), non-special category States, population, poor per capital income of States, distance factors and fiscal performance (tax effort, fiscal management, fulfilment of national objectives and special problems). These two financial institutions operating independently of each other are said to have undermined the overall coherence of equalisation efforts in India [Bhattacharyya, "Federalism, Decentralisation and State-Building in India: Aspects of Centre-State Fiscal Relations" in R Bird and T Stauffer, eds. Intergovernmental Fiscal Relations in Fragmented Societies (Bale, Helbing and Lichtenbahn, 2001) pp.247-317].

Neither regional equalisation, nor the principle of horizontal fiscal equalisation has played a major part in the programme and activities of the Indian Finance Commission and the Planning Commission.

United Kingdom

There is no formal system of explicit equalisation in the United Kingdom either of resources or of needs of the type available in Australia and Germany. However, a formula-driven pattern of resource distribution appeared with the emergence of the administrative territorial division of the United Kingdom. It first appeared in 1888 when Sir George Goschen applied a formula (which came to be known as Goschen Formula) to Scotland. It became necessary after Scotland had acquired a territorial administration with the creation of the Scottish Office in 1885. The Scottish Office had the responsibility to distribute central government grant to local authorities in Scotland. The formula was extended to Ireland in 1888. Wales was at that time deemed to be part of England but its administration was transferred to the Wales Office in 1964.

The Goschen Formula decreed that proceeds of the wheel tax, horse tax and half the revenue from probate should be allocated to England, Scotland and Ireland in the ratios 80, 11 and 9 respectively. This formula was not based on population, nor on needs but on the contribution each country made to probate duty revenues. It was not an equalising formula but simply a device to recycle some taxes back to the territory where they were collected. The formula continued to operate till 1958 when it was abandoned. Thereafter funding for the Scottish, Welsh and Northern Ireland Offices became the subject of annual negotiation between the three territorial Secretaries and the Treasury at Westminster.

The practice continued until 1978 when Barnett Formula was introduced in the anticipation of Scottish devolution. Notwithstanding the fact that devolution did not materialise at the time it has continued since then [McCrone, G. (1999) 'Scotland's Public Finances from Goschen to Barnett' (Fraser of Allander Institute Quarterly Economic Commentary, vol.24. No.2)]. The Barnett Formula operates only on increments, not on the base, allocating to each devolved territory a population based percentage of the increase in comparable expenditure in England. Thus for any spending programme, where there is a territorial responsibility such as education, any increase to English budget results in an automatic increase to Scotland, Wales and Northern Ireland's budgets. For every £1 per head extra spent on England, £1 per head extra should also go to each of the devolved territories. The population of each devolved territory is expressed as a fraction of England's population and not as a fraction of total UK population. It does not affect all public spending in the devolved territories. For example, in 1998-99, £25.7bn was identified by the Treasury as the total sum spent in Scotland. Of this only £15.6bn was in the block of spending controlled by the Scottish Executive. Most of the remaining £10.1bn was social security spending which comes directly from the central government. The Barnet Formula operates only on the devolved subjects and not on subjects reserved to Westminster. Even within the Scottish Executive budget about 14% of spending budget is not covered by the Barnett Formula. This is mainly on agriculture and is determined by the EU decisions. Neither does the Barnett Formula determine the overall levels of spending in Scotland, Wales and Northern Ireland. It only determines the changes made to the overall spending totals. If there is no increase in the English spending programme, the devolved territories receive no increase. If there is a reduction, the devolved territories also have their spending reduced [Twigger, R. (1998) The Barnett Formula, House of Commons Library Research Paper 98/8]. The Barnett Formula is not based on any assessment of needs for public spending but on population. In fact both the assessment of needs and basing spending programmes on it are not easy. For instance, the British Treasury conducted a study in 1976-78 in anticipation of devolution in Scotland and then discovered that the figures of actual spending in Scotland and Northern Ireland were considerably higher than those based on needs. Implementation of the needs-based figures would have involved significant cuts in the spending programmes for Scotland and Northern Ireland. Any such cuts could have provoked a political reaction from those territories. For this reason the needs-based figures were not implemented. The Barnett Formula seems to be unique in the developed world. There is no country other than the UK that allocates resources at a sub-national level using a formula based on changes rather than levels of spending in relation to assessed need [David Bell and Alex Christie, "Finance - The Barnett Formula: No Body's Child ?" in Alan Trench (ed) The State of the Nations 2001 (The Constitution Unit, ULC (2001) p. 139)]. Therefore we might conclude by saying that the Barnett Formula does not offer any lesson for a solution to the questions of (a) regional equalisation, or of (b) horizontal fiscal imbalance in the broad sense. It is of limited value as a prescription for bringing about uniform standard of living throughout the territories of the proposed confederation/federation.

Equalisation Machinery

The question of status and standing of the machinery making the equalisation decisions is of utmost importance to its success. In most Commonwealth federations the actual determination of financial equalisation is made by the federal government but it is based on the recommendations of an expert commission as in Australia, India and South Africa or upon an intergovernmental council as in Pakistan and Malaysia. In all these cases the recommending expert institution is an advisory body. The extent to which its recommendations are accepted by the federal government has varied between these countries. In Australia and India the advice of the expert body on equalisation has invariably been accepted by the decision-making body while in South Africa the federal government has emphasised that the expert body (the Financial and Fiscal Commission set up under ss. 220 and 221 of the Constitution) is merely an advisory body and that it is the federal Minister and Department of Finance that exercise the real decision-making power. Furthermore, this is done overtly [Watts, R L, Comparing Federal Systems (1999, 2nd ed., Montreal and Kingston: McGill -Queen's University Press)]. It is thought that the success of fiscal equalisation in Australia is due to the fact that the Commonwealth Grants Commission is de facto, if not de jure the decision-making body on the matter.

I have addressed myself to this issue in the following terms:

"The need for such a body in a federal system arises from the fact that the federal government being itself an interested party could not be made the arbiter over allocation of resources between the Centre and the Regions. To ensure the autonomy of the Regions an independent body is called for. This raises the question as to the nature of the body. Should it consist of the negotiating parties or should it be an impartial body; should it be a permanent body or should it be an ad hoc body set up periodically; should it act in an advisory capacity or should it be an adjudicatory body with power to make binding decisions? If permanent, should it have a specialist staff and a permanent secretariat? Should it be able to act by a majority decision or need it follow the rule of unanimity?"

"The inter-governmental financial institution proposed has a major role to play in our federal scheme. It would periodically review the tax-sharing arrangement between the Centre and the Regions and consider its adjustments, allocate shares of taxes between the two, allocate the shares of regional taxes among the states, decide on applications for borrowing by the states and administer an ambitious programme for equalisation […] to remove regional disparities between the states involving billions of pounds. It would have power to take economic decisions of immense importance, power of conciliation and adjudication over conflicting claims and authority to offer economic advice to governments at the central and regional levels. To be effective, such a body has to be impartial standing apart from and above all the interested parties. The atmosphere in the meeting of the bargaining body is inconsistent with the functions contemplated in this proposal. The atmosphere of a bargaining meeting is dominated by political stress and strain, groupings and alliances, the strongest tending to have the last word. The experience of the Australian Grants' Commission shows that impartiality and independence are essential to earn public confidence which is sine qua non for its success. From this it follows that the composition of the body cannot be entrusted to one of the interested parties. Following the precedent of S.32 of the Government of Ireland Act 1920 the Joint Exchequer Board of the United Kingdom federal system should consist of a member nominated by each federating unit, one member nominated by the federal government and the chairman appointed by the Monarch not on the basis of ministerial advice of the federal government but having regard to his expertise in Treasury affairs, impartiality (as between different governments) and independent judgment. Such a body ought to be constituted on a permanent basis. A permanent body will have the advantage of gaining expertise and consistency which an ad hoc body will lack. The drawback from these bodies suffered in most of the new federations (by contrast with the Australian Grants' Commission) was the lack of continuity, each body being appointed afresh at the time of each review. An ad hoc body is appropriate for functions of an ad hoc nature, but not for the nature of functions envisaged in this proposal for the Joint Exchequer Board. It follows that the Joint Exchequer Board ought to have the power to make decisions of a binding nature and not of advisory nature. The foundation of this proposal is the division of powers and functions between the Centre and the Regions with the Joint Exchequer Board acting as a third party allocating resources and adjudicating between them. If this body were to act in an advisory capacity only and the decision-making powers were to belong to the Centre the system would cease to be federal".

"S. 32(5) of the Government of Ireland Act 1920 empowered the Joint Exchequer Board to act by majority decision. It is submitted that the rule of majority decision is a sound one . If the rule of unanimity were to apply and the members could exercise a veto on decisions of the Joint Exchequer Board on which would depend the budgets of the federal and state governments the whole system would become unworkable. However, it is extremely vital that the Chairman of the Board be impartial….[T]o make the Joint Exchequer Board less political and more independent the costs of the Board (including salaries of the members and staff) should be charged on the federal Consolidated Fund. The Constitution will ensure that these could be increased but not reduced by the federal parliament." [M A Fazal, A Federal Constitution for the United Kingdom - An Alternative to Devolution (1997) pp. 107-109].

The case for an independent and impartial decision-making equalising machinery as opposed to a merely an advisory body cannot be too strongly emphasised.

Conclusions on Equalisation

Appropriate provisions of equalisation are crucial to the success of our proposed confederation/federation. However, mere fiscal equalisation of the vertical type is not sufficient for the purpose. Horizontal equalisation is vital to ensure both the revenue capacities and funding for the expenditure needs of all the states of the proposed federation. Even achievement of vertical and horizontal fiscal balance on its own might not be able to ensure uniform standard of living conditions and the same level of prosperity throughout the territories of the federation. This will call for what I have labelled as 'regional equalisation' to establish broadly uniform levels of economic development among all the states of the federation. This, in turn, calls for the establishment of an independent financial institution entrusted with the task of allocating resources between the federation and the states and between the states inter se to bring about the goal of equalisation. In most Commonwealth federations the financial institution in question acts in an advisory capacity, the final decision on the matter being vested in the federal government. My own preference would be to vest the equalisation decision-making power (as distinct from its being merely a recommendation) in the financial institution itself. The relevant measures ought to be embodied in the federal constitution giving the institution the appropriate status and independent authority to take the necessary measures to bring up the relatively backward regions to the common level of economic growth and performance. It is hoped that the equalisation measures recommended here will lay the foundation of a durable and successful federation/confederation, sine qua non, for the preservation of peace and security in this region.

The solution, as proposed here, calls for public discussion and consideration by the appropriate authorities.

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