Garnaut Fitzgerald Review of Commonwealth-State Funding

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CHAPTER 10: Efficiency and Economic Growth Boadway and Flatters (1982) recognise the same problem but reach a different conclusion. They argue: being small economies in a world of mobile labour and capital, the extent to which provinces can pursue widely differing policies of redistribution is fairly limited…To devise a scheme that is perfectly equitable from a nationwide point of view would…amount to the federal government imposing upon the provinces its own norms of equity and behaviour. Apart from the unfeasibility of such a scheme, it strikes us as being contrary to the spirit of the Canadian Federation. (p. 48) This debate shows a clash of values, very obvious from Buchanan’s statement that ‘Equality in terms of States is difficult to comprehend, and it carries with it little ethical force for its policy implementation’ (1950, p. 586). What is important to this chapter is the ‘efficiency’ issue: to what extent are the efficiency gains from central government intervention offset by efficiency losses through constraining States to act in accordance with central directions Chapters 5, 11 and 12 include more extensive discussion about the desirability (or otherwise) of central government direction in the use of grants. Buchanan’s views on the potential for equalising transfers to enhance efficiency were contested by Scott (1950), who argued that, by helping to provide amenities to poor people in resource-poor States, assistance grants may impede labour mobility and perpetuate allocative inefficiency. Different analytical perspectives underlie Buchanan and Scott’s conclusions. Buchanan and Wagner (1970) noted later that Scott assumed an economy out of long-run equilibrium, whereas Buchanan’s implicit model was one of comparative statics. As discussed later, this issue is still very relevant to the debate about the efficiency effects of equalisation. Another area of debate centred on whether the fiscal residuum should be defined in terms of marginal or total benefits (the latter incorporating the taxpayers’ surplus from the willingness of others to pay for public services), and whether it is inefficient for equals in different States to have different fiscal residua. Musgrave (1961) argued that the higher taxpayer surplus available in richer communities should not be classified as distorting the regional allocation of resources, but as constituting ‘a given datum for location, just as does the geographical distribution of natural resource deposits…efficiency is not served by erasing this feature of the map’ (p. 133). More precise analytic methods were developed to deal with these issues (Buchanan and Wagner 1970; Buchanan and Goetz 1972; Flatters, Henderson and Mieszkowski 1974). In these papers, inefficient resource allocation was seen as a result of potential migrants between States not considering the possible benefits or costs of their decisions on the rest of the population. In other words, potential inefficiencies in resource allocation arise because of the externalities associated with migration. Important examples of externalities include: • At small population sizes, there may be economies of scale in production, or improved social amenities. • At large population sizes, there may be congestion costs – diseconomies of scale in production or increased social dysfunction. • There may be rents (e.g. good public services, good environment, wages above the long run marginal product of labour due to low capital mobility or non-competitive labour markets) to which State residency provides access. FINAL REPORT [138]
CHAPTER 10: Efficiency and Economic Growth • Fiscal externalities may arise from State tax and expenditure policies (e.g. low income migrants to a State are likely to use more public services than they pay for in taxes, imposing a cost on the State to which they migrate, and generating a benefit for the State they leave). The first three also include some fiscal externalities, for example: • economies of scale may apply to publicly provided goods • social dysfunction may require a public response (e.g. more police and welfare services) • States may fund services through taxes with a rent component (e.g. royalties, land tax, conveyance duties and wages to the extent that these differ from long run marginal product of labour). The theory of externalities suggests that inefficient migration outcomes (i.e. too much or too little migration) may occur in the absence of offsetting fiscal transfers between States. It is, however, not possible to use untied fiscal transfers to eliminate inefficient migration in a Federation. As an extreme example of the problem, where one State has a progressive tax structure and another State has a regressive tax structure, inefficient migration will generally occur for all choices (and directions) of fiscal transfers. Is the CGC process justified by fiscal externalities The literature on fiscal externalities is often used to justify the CGC’s fiscal equalisation process. However, the real picture is more complex. The literature suggests there is an efficiency case for and against transfers, depending on circumstances. The case for transfers does not say unequivocally that a central authority should mandate them. Myers (1990) and Shapiro and Petchey (2000) argue that States will provide transfers that are optimal from an efficiency perspective if they wish to optimise their residents’ welfare. This raises the question of whether the States would agree voluntarily on the current pattern of CGC subsidies. The externality analysis provides some support for elements of the CGC process (equalisation for revenue capacity, administrative scale and demand). However there are important differences. • The CGC considers the public sector, whereas efficiency optimal transfers need to consider all externalities – not just those involved in the public sector’s provision of services. FINAL REPORT [139]
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Review of Commonwealth-State Fundin
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Review of Commonwealth-State Fundin
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TABLE OF CONTENTS CHAPTER 9: Equity
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THE REVIEW COMMITTEE FINAL REPORT [
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EXECUTIVE SUMMARY Overall assessmen
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EXECUTIVE SUMMARY Each State would
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CHAPTER 1: Overview and Summary of
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CHAPTER 2: How the System Grew: A H
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CHAPTER 3: The Current System TABLE
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CHAPTER 3: The Current System 3.3 G
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CHAPTER 3: The Current System Natio
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CHAPTER 3: The Current System FINAL
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CHAPTER 4: Allocation of General Pu
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Chapter 5: Specific Purpose Payment
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CHAPTER 6: Comparative Fiscal Posit
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Page 118 and 119: CHAPTER 7: Other Federations FINAL
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CHAPTER 12: Overall Assessment and
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CHAPTER 12: Overall Assessment and
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CHAPTER 13: Commonwealth-State Fina
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APPENDIX A: National Health and Age
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APPENDIX A: National Health and Age
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APPENDIX B: National Education and
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APPENDIX C: National Indigenous Com
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APPENDIX C: National Indigenous Com
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APPENDIX D: Minimum Cost of Governm
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APPENDIX E: Consultation • Local
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APPENDIX E: Consultation • VICRoa
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GLOSSARY Efficiency: allocative eff
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GLOSSARY merit goods (health, educa
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FINAL REPORT [234] GLOSSARY
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BIBLIOGRAPHY Buchanan, JM 2001, Fis
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BIBLIOGRAPHY Government of Victoria
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BIBLIOGRAPHY Watts, RL 1999, Compar
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INDEX E economic activity / growth
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INDEX O other Federations Canada ·
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Garnaut Fitzgerald Review of Commonwealth-State Funding

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