Australians Agree with Canadian Equalization Analysis

Equalization, Frontier Centre, Uncategorized, Worth A Look

In November 2001, the governments of New South Wales, Victoria and Western Australia launched the independent Review of Commonwealth–State Funding. The three States established the Review to independently assess the Commonwealth’s methods of allocating Commonwealth grants to the States and Territories.1 The Review has considered untied or general purpose grants (about $32 billion per year) and specific purpose payments (SPPs) (about $21 billion per year).

The Review Committee was asked to assess the current system in terms of economic efficiency, equity, and simplicity and transparency, to consider the relative circumstances of the States and, if recommending reforms, to consider transitional arrangements.

In searching for analysis of comparative models of fiscal equalization between federal and state governments in a federation, the review commissioners looked to the award winning equalization initiative done jointly by 3 independent Canadian think tanks. Specifically, they cited “Equalization Revisited” by Nobel Laureate James Buchanan, as it was presented during an event in Montreal which the Frontier Centre co-sponsored with the Montreal Economic Institute and the Atlantic Institute for Market Studies in Halifax.

Not only did the commissioners consider the work of the Canadian think tanks in their review, they came to almost identical conclusions about the impact of fiscal equalization within a federation.

This independent Australian review concluded that the current system affects national economic performance in many ways:

  • Interstate transfers affect the distribution of population, economic activity and development.
  • General purpose payments and SPPs involve significant overhead costs and result in game playing.
  • The CGC methods for distributing the GST reward ‘cost disabilities’ and inefficiency, and distort the size and shape of the public sector in recipient States.
  • The CGC approach distributes the revenue benefits from economic development around the nation, without similarly sharing many of the costs of economic development borne by State Governments.
  • An economic study commissioned by the Review puts the quantifiable economic costs of the interstate transfers through the current system at between $150 million and $280 million each year (Dixon et al. 2002). In addition, administration costs for the CGC and SPPs would exceed that amount.

    The Commissioners went on to say that they:

    “…suspect that the political economy effects on policies favouring development and growth may be more fundamental problems with the current approach. The need for States to prove continually that their service delivery costs are higher, and that their opportunities to raise revenue are lower than in other States, distorts decision making.

    Equalising away the fiscal effects of a State’s good or poor economic performance dulls incentives for growth-promoting policies. The tendency for recipient States to have disproportionately large public sectors and small private sectors makes their Governments less sensitive to the regulatory and policy requirements of strong economic growth in a market economy.”

    To look at Frontier’s work on equalization and see how the Australian conclusions mirror the Canadian impacts click here.

    To explore the final report of the Australian “Independent Review of Commonwealth–State Funding” click here.