Decentralization is the relationship between the central and local levels of government, in which a certain part of the activity is directed towards the activities that regional and local government units need and must perform, and they are given autonomy in financing certain expenditures as well as in the ways of collecting revenues. The main topic of this paper is to explain the concept of fiscal decentralization, its effects and methods of measurement, and then to clarify the general advantages and disadvantages of fiscal decentralization. After that, it is necessary to clarify the system of local and regional (regional) self-government in the Republic of Croatia, in order to understand in greater detail the financing of local and regional self-government units, as well as to analyze their budgets. Furthermore, the sources of revenue of local selfgovernment units is analyzed, as well as their division, the share of total revenues and the importance in relation to other revenues. In the last, and perhaps most important part of the paper, the system of fiscal equalization will be addressed. Based on the fact that there is vertical and horizontal fiscal equalization, the concept of grants is defined as the main instrument of horizontal fiscal equalization and the criteria for their allocation will is explained. At the end of the paper, the issue of fiscal equalization in the Republic of Croatia is addressed.