Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 9: Equity
9.3 Horizontal distribution – equal
treatment of equals
How does the established pattern of Commonwealth payments to the States affect the
horizontal income distribution, i.e. treat all Australians in similar economic circumstances
in a similar way
The most powerful Commonwealth fiscal interventions are via the taxation and social
security systems. These systems broadly meet the test of horizontal equity – with some
exceptions that do not appear to have systematic regional biases.
The provision of government services is less satisfactory from the perspective of
horizontal equity. Fair distribution of services most important to equality of opportunity in
Australia – notably education and health – is especially important to Australians’
conception of equity. Community development services for Indigenous people are also
of special importance to equality of opportunity.
There are well-known systematic regional differences in the quality of services available
to Australians (e.g. between metropolitan, provincial, rural and remote areas). Some
differences are inevitable, reflecting differences in the costs of provision of services in
different locations, while others are possibly amenable to policy change.
States are mainly responsible for delivering the services most important to equality of
opportunity, known as merit services. However the Commonwealth influences outcomes
by allocating SPPs to these activities, which effectively splits responsibility for service
delivery between the levels of government. Commonwealth resources also flow to merit
services by providing general purpose payments to expand States’ capacity to provide
services generally.
Allocating SPPs to the main merit services gives some priority to equitable horizontal
distributions throughout Australia, which is reflected in Commonwealth conditions placed
on the use of funds. However these efforts and conditions are to a considerable extent
negated by the CGC’s treatment of SPPs as untied revenue to the States.
The CGC’s application of horizontal fiscal equalisation (HFE) in the late 20th century has
failed as an instrument of horizontal equity on two grounds:
(1) it focuses on horizontal equity between States, and not between individuals and
households
(2) to the extent that States might be a relevant category for HFE purposes, it focuses
on providing fiscal capacity to provide merit services to various communities,
without requiring funds to be spent in accordance with their allocation.
Considering the definition of HFE, it is illuminating to examine James M. Buchanan’s
Federalism and Fiscal Equity (1950), which stated that an ideal HFE system would deal
with transfers between individuals, not States, but that such an idea may be impractical
(Walsh 1989).
FINAL REPORT [130]