Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 8: Federal Policy Effects
on Interstate Distribution of Incomes and Economic Activity
8.2 Commonwealth income transfers
and production effects
The allocation of GST proceeds among the States provides a clear example of how
Commonwealth fiscal policies can affect interstate income redistribution. Table 8.1
shows in per capita terms how the GST proceeds are disbursed across States on the
basis of the CGC’s application of horizontal fiscal equalisation (HFE) principles.
TABLE 8.1: Individual welfare transfers via GST redistribution, 2000–01 ($ per capita)
NSW VIC QLD WA SA TAS ACT NT
Collections 1 383 1 260 1 172 1 152 1 156 1 068 1 524 1 061
Grants 1 117 1 063 1 295 1 251 1 519 2 102 1 512 6 239
Transfer -266 -197 123 99 363 1 034 -12 5 178
New South Wales and Victoria provide large transfers to the other States via the GST
redistribution. These transfers can largely be interpreted as net welfare benefits to
residents of a State (as GST-funded State expenditures largely flow through to
individuals in that State, and most GST is raised from Australian residents).
The net first round impacts of this redistribution on production differ slightly across
States, reflecting the consumption of overseas and interstate-produced goods and
services. Table 8.2 incorporates rough adjustments to reflect a production effect basis
(i.e. the impact on production in each State). This assumes that State GST expenditures
largely flow through to the purchase of outputs from the State, with standard proportions
of consumption sourced from imports, 8 locally produced and consumed goods, and
nationally traded manufactured goods.
TABLE 8.2: Production effects from GST redistribution, 2000–01 ($ per capita)
NSW VIC QLD WA SA TAS ACT NT
Collections 1 285 1 411 1 129 1 136 1 322 1 180 963 909
Grants 1 117 1 063 1 295 1 251 1 519 2 102 1 512 6 239
Transfer -168 -348 166 116 198 922 549 5 330
In most cases, other than redistribution of the GST proceeds, there is little direct
correspondence between Commonwealth spending and revenue raising. It is useful to
compare the distribution of the program (e.g. Commonwealth spending on defence)
across States against some neutral benchmark (e.g. equal per capita).
8
Price effects on the Australian economy work through the impact on exchange rates. An equal per capita negative
production effect across States is assumed for GST paid on imports.
FINAL REPORT [111]