Examining Horizontal Fiscal Equalisation in Australia
AbstractIn 2010-11 over $45 billion GST monies, and about $24b of other grants, will be distributed between the States and Territories on the recommendation of the Commonwealth Grants Commission. The Commission is instructed to implement Horizontal Fiscal Equalisation (HFE); and not to be concerned with efficiency. The paper examines how the CGC pursues fiscal equality, and finds some systematic flaws. The adjustments made by the CGC for demography and mining, but not for wages, undoubtedly reduce inequality in fiscal capacities, from a short-run point of view. However, for payroll tax assessments, the CGC can mistakenly transfer moneys from equals to equals; and disturb an efficient pattern of interstate migration and settlement. The reason is that labour mobility tends to make working households indifferent between jobs in different jurisdictions, with the differences in wage rates compensating for locationally-specific differences in costs of living. In addition to equity flaws, I note some negative efficiency effects, as counterweights to the common claims that HFE improves economic efficiency. Interestingly, HFE in Australia strives for full equalisation of state budget capacities; in contrast, governments attempt only partial equalisation of private budget capacities. I present a framework for considering the trade-off between equality and efficiency, adapted from Brennan and Pincus (2004 and 2010). The main result is that little or no allowance should be made for interstate differences in unit costs of public provision of (public or private) goods and services. An alternative distribution of GST monies is estimated for 2010-11.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2011-25.
Length: 28 pages
Date of creation: Jun 2011
Date of revision:
fiscal equalization; Australian fiscal policy;
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edward L. Glaeser & Joshua D. Gottlieb, 2009.
"The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States,"
Journal of Economic Literature,
American Economic Association, vol. 47(4), pages 983-1028, December.
- Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," NBER Working Papers 14806, National Bureau of Economic Research, Inc.
- Peter B. Dixon & Mark R. Picton & Maureen T. Rimmer, 2002. "Efficiency Effects of Inter-Government Financial Transfers in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 35(3), pages 304-315.
- Flatters, Frank & Henderson, Vernon & Mieszkowski, Peter, 1974. "Public goods, efficiency, and regional fiscal equalization," Journal of Public Economics, Elsevier, vol. 3(2), pages 99-112, May.
- James M. Buchanan & Richard E. Wagner, 1970. "An Efficiency Basis for Federal Fiscal Equalization," NBER Chapters, in: The Analysis of Public Output, pages 139-162 National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dmitriy Kvasov).
If references are entirely missing, you can add them using this form.