Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 8: Federal Policy Effects
on Interstate Distribution of Incomes and Economic Activity
Commonwealth policies have a strong redistributional impact on personal incomes. For
example, high-income earners generally contribute more in taxes than they receive in
benefits (including services) from the Commonwealth, while low-income earners
contribute less. Similarly, the social and economic diversity of regions around Australia
means that the net impact on regions (as distinct from individuals) of Federal policies
varies. For example, regions with a high proportion of wealthy taxpayers contribute more
in taxes than they receive in benefits.
This chapter focuses on the eight Australian jurisdictions, although the points made
apply conceptually to smaller (or indeed larger) regions. The impact of Commonwealth
policy on regions is measured in two main ways:
(1) the net welfare benefit or fiscal residuum to individuals in a region, i.e. the total
level of Commonwealth public services and benefits received, less
Commonwealth taxes paid (both directly and indirectly)
(2) the impact on each region’s level of production, i.e. the net Commonwealth
contribution to purchasing goods and services from the region less the net
Commonwealth impact (via taxes) on the cost of these outputs. 7
In both cases, there are not only first-round effects but flow-on effects that can only be
comprehensively assessed through a full general equilibrium analysis which has not
been undertaken for this Report.
Further, (1) and (2) differ slightly because production, consumption and ownership can
all be in different regions, with all factors (excluding land and other natural resources)
mobile to some extent. The existence of an external sector and various other effects add
to the differences. For example:
• pensions paid in region A may increase demand for goods produced by a company
in region B, possibly owned by someone in region C
or
• tax on a company operating in region A will reduce the income of shareholders
residing in region B, reducing their demand for goods purchased in region C.
Often the regions of production, consumption and factor ownership are the same.
However, marked differences can occur.
There are also problems with presenting the effects on production within regions as the
available data are a mixture of individual welfare and production effects.
7
Contributions to the purchase of outputs in a region can be direct (e.g. Commonwealth direct payment to service
provides) or indirect (e.g. income support enabling recipients to purchase goods and services). Contributions can
also be negative (e.g. taxes on consumption and income). Impacts on the cost of outputs include Commonwealth
taxes on production and inputs and can be negative (e.g. production bounties reducing pricing to purchasers). A full
equilibrium analysis needs to recognise that Commonwealth taxes and expenditures change the demand and
supply curves for outputs and factors, and lead to further price effects.
FINAL REPORT [110]