Assessing the Scope for Effective State Government Macroeconomic Policy: A Tasmanian Example

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. Two policy packages are investigated using a dynamic two-region computable general equilibrium 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 not found to be feasible - the changes in policy instruments required to maintain a constant share of national GDP are excessively large, relative to the original tax bases upon which they operate. Hence, a second and (comparatively) less ambitious policy change 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.