The Impact of Equalization on Service Delivery

The founders of the Australian federation recognized the need for transfer payments from the national to state level governments and made provision in the Constitution to achieve that end. Transfers are required to overcome the vertical fiscal imbalance (VFI) between the levels of government and also to provide greater financial assistance to some States than to others. The arrangements for providing extra assistance to particular States were first formalized in 1933 with the creation assistance to particular States were first formalized in 1933 with the creation of the Commonwealth Grants Commission (the Commission). In 1936, the Commission (and the Australian Government) took a concept developed earlier by one of its members and decided that grants to the States would be provided on the basis of horizontal fiscal equalization (HFE). However, it was not until the early 1980s that a comprehensive system of HFE was introduced. As a result of this comprehensive system, the Commission has 26 years of data, from 1977–78 to 2002–03, on: i) The revenues and expenses of the States on a largely comparable accounting and classification basis ii) Australian average per capita State revenues and expenses iii) Standardized revenues and expenses of the States iv) The relative revenue raising capacities of the States, and their relative costs of providing Australia average levels of services; and v) The relative revenue raising efforts made by the States, and the relative levels of services they provide.