Targeting Regional Output with State Government Fiscal Instruments: a Dynamic Multi‐regional CGE Analysis

Between 1986/87 and 1998/99, Tasmania's share of national output declined from approximately 2.3 per cent to 1.9 per cent. At least two forecasters have projected that Tasmania's share of national activity will continue to decline over the period 1999/00 to 2003/04, falling to 1.7 per cent of national activity by the end of this period. This paper investigates whether it is within the power of the Tasmanian government to influence materially this forecast outcome by means of a budget neutral tax policy. Two such policy packages are investigated using a dynamic two‐region CGE model of the Australian economy (FEDERAL‐F). In the first, the question asked is whether there exists a feasible re‐arrangement of the Tasmanian government's revenue raising effort which has the effect of maintaining, over the forecast period, Tasmania's share of national GDP at its 1998/99 level. This is found not to be so. Hence, a second and (comparatively) less ambitious policy is then considered. This involves the gradual but complete elimination of payroll tax over the forecast period, and its replacement with a direct tax on households. Even when such a dramatic tax change as this is considered, the impact on the forecast for Tasmania's share of national activity is not large.