Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 9: Equity
Moreover, no Australian State appears to be severely depressed financially. Every State
has areas of particular need – in metropolitan, rural or regional areas – often existing
alongside areas of relative prosperity and economic dynamism. There are good reasons
in a Federation to provide support for a State that encounters serious difficulty and
threats to its financial viability. While ensuring that all States remain financially viable
may indirectly affect equity, there is no sense in which the concept of equity can usefully
be applied to States. The current system should be assessed against equity criteria on
the basis of the outcomes it achieves for Australian individuals and households – not
States.
It is possible to base an HFE distribution on monitoring and evaluating outcomes without
prescribing them, but the evolution of the CGC’s approach has created a system that
equalises States' ‘capacity’ to provide services, not service provision. Supporters of the
system suggest that equalising the capacity of States of a Federation may be the only
feasible method, but Buchanan argued that individuals should still feel the effects of
equalisation, even if it had to be filtered through the States.
The associated divergence between equalisation of capacity to provide services across
States, and equal treatment of individuals in access to merit services, is considerable.
Large differences between levels of services available in metropolitan, provincial, rural
and remote regions are accepted and in some respects entrenched by the system. And
there are major examples of States applying the exceptional costs allocated to support
the provision of high-cost services to some communities, for other purposes.
We believe that equitable access to services in merit areas, such as health, education
and housing, is best dealt with directly through national arrangements in those areas,
covering respective roles in funding and management of service delivery. Such
arrangements work best when allocations and attached conditions:
• reflect consultation between Commonwealth and State Ministers and their
departments
• are founded on agreement on broad outcome objectives and priorities, and include
ways to measure outcomes
• eschew Commonwealth intrusion into State service delivery.
9.4 Other conceptions of equity
The concern for equity among Australian States that was apparent in the early years of
Federation is less relevant today, but still impinges on the equitable treatment of
individuals across States. Many Australians hold the view that it is inequitable to transfer
all above-average revenue generating capacity from economically successful States to
others, and that there should be some fiscal return from growth promoting policy at the
State level. There is a widely held view in Australia that State Governments should
receive some support in times of fiscal stress. In Australian approaches to reform, it is
also accepted that major changes in policy affecting income distribution should be
introduced gradually, giving affected citizens time to adjust.
All these conceptions of equity need to be considered when proposing reform to
Commonwealth–State financial relations. But, in our opinions, most Australians share
the view that reducing extremes in inequality in the distribution of income among
individuals and households (vertical equity) is of primary concern.
FINAL REPORT [131]