Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 9: Equity
Chapter 1 notes that other tests of equity have sometimes been considered relevant.
There is some support for an earner’s test – that, in the absence of good reason to the
contrary, it is equitable for income to be left with the person who generated it. This is
qualified by the near universal acceptance that some intervention to redistribute income
and access to services is justifiable on grounds of vertical equity. But the qualification
does not extend to support for confiscating all above average individual or household
income, which would follow from raising living standards of the poor to average.
Outside Australia welfare economists sometimes apply a more severe test – that there
can be no certainty that a change in the distribution of income is equitable from the
perspective of all unless it increases the income of at least one person without reducing
the income of anyone else. One difficulty with applying this test is in defining the
appropriate baseline distribution. Is this the distribution present under established policy,
the distribution as political authorities have promised it for the future, or even what some
citizens believe has been promised for the future Government, let alone reform, would
be impossible if the latter perspectives were dominant. However, the presence of this
perspective suggests that significant policy changes require long periods of adjustment.
9.2 The primary test: vertical distribution
of income
How does Commonwealth Government policy, in particular policy related to
Commonwealth–State funding, affect the vertical distribution of income in Australia
To answer this question, the Review commissioned a major piece of research from the
National Centre for Social and Economic Modelling (NATSEM) at the University of
Canberra (Harding et al. 2002).
The NATSEM study covered household-weighted and person-weighted distribution of
income. It reported the effects of Commonwealth policy on the distribution of income
using two separate techniques – the Gini coefficient 10 and distribution across income
deciles. 11
Table 9.1 sets out the effects of Commonwealth policy on income distribution as
measured by the Gini coefficient. A lower coefficient points to more equal distribution.
Coefficient values are shown for:
• the current system of grants allocation
• the replacement of the current system by two hypothetical benchmark scenarios
specified by the Review Committee:
− an equal per capita allocation of Goods and Services Tax (GST) revenue
− a State of origin allocation (i.e. returning GST proceeds to the States that
generated them)
• a number of different stages of income, with progressive effects of successive layers
of government policies affecting income distribution shown.
10
The Gini coefficient measures the extent to which the distribution of income among individuals or households
deviates from a perfectly equal distribution. Zero represents perfect equality, while one represents absolute
inequality.
11
In a decile analysis, households or individuals are grouped into ten groups of equal size by income.
FINAL REPORT [124]