Garnaut Fitzgerald Review of Commonwealth-State Funding

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CHAPTER 10: Efficiency and Economic Growth While the CoPS model provides important insights on the efficiency impact of fiscal equalisation, it does not provide a fully comprehensive analysis. Some significant limitations in the analysis are identified below. • The analysis assumes that the States’ current economic circumstances reflect a long-run equilibrium – i.e. the distribution of capital and labour across States is presently optimised for the current grant distribution arrangements. It is far from clear that this is the case (see below). This issue goes back to the debate between Buchanan and Scott about the efficiency of grant subsidies (see Section 10.1). • The labour–capital composite CoPS used implies a closer link between labour and capital than is actually the case. In practice, often the owner of capital does not reside in the same State (or even the same country) as the owner of labour. However, the household and State Government welfare maximising strategies in the CoPS model are based on capital within the State being owned by households within the State. • The CoPS model pays little attention to the production side of the economy. There is a fixed constant relationship between production and the labour-capital composite in each State (apart from a scarcity factor for minerals). There are no scale economies, no export sector and no role for Governments to influence production functions. • The CoPS model’s treatment of expenditure externalities is inevitably provisional and approximate. This treatment is necessitated by the fact that populations in the CoPS model are undifferentiated, and the benefits of many publicly provided goods are not easy to capture. CoPS assumed that 12 per cent of State Government expenditures were unavoidable. This is intended to reflect the cross-subsidy between taxpayers who pay more tax than they receive in expenditure benefits, and taxpayers who receive more in expenditure benefits than they pay in tax. All other expenditures can, in principle, be paid from benefit taxes. If this were increased to 24 per cent, the welfare gain from equal per capita funding would be halved. More likely, however, the 12 per cent figure is about right, but its distribution between the States is not as assumed by CoPS. FINAL REPORT [144]
CHAPTER 10: Efficiency and Economic Growth 10.5 Political economy of the flypaper effect Recipient States that receive large transfers relative to their economies have public sectors proportionately much larger than other States due to the flypaper effect. The corollary is that private employment and incomes are relatively less important in recipient economies. Recipient States generally have much smaller private sectors, regardless of their citizens’ preferences for private and public goods (Table 10.1). The CoPS study (Dixon et al. 2002) observes there is no reason to expect that residents of recipient States have stronger preferences for public rather than private services than residents of other States. TABLE 10.1: Private full-time employment as a percentage of population 15+ 1983 1986 1991 1996 2001 NSW 31.5 33.3 34.4 35.6 36.3 VIC 33.2 34.6 33.4 36.5 37.2 QLD 32.2 33.5 33.5 35.4 34.5 SA 29.8 31.4 31.1 31.7 32.1 WA 32.7 35.1 33.2 37.2 37.1 TAS 28.5 29.7 29.7 29.6 28.1 NT 37.4 36.7 40.4 37.3 37.0 ACT 17.8 20.6 21.1 21.7 25.5 AUSTRALIA 31.8 33.4 33.3 35.3 35.6 Source: ABS (unpub.) In Victoria the ratio of private full-time employment to population over fifteen years is almost one-third higher than in Tasmania. The failure of the private employment ratio to rise in Tasmania over the past two decades and the small increase in South Australia contrasts with large increases in the rest of Australia. Such artificial expansion of public relative to private sector employment and income inevitably affects the political economy of policy making. A State in which relatively few people draw their main household income from private employment is likely to be: • less sensitive to the policy and regulatory requirements of a market economy • less supportive of growth-oriented taxation and regulatory policies • over time, in danger of generating low levels of private investment, leading to low growth rates and, under current Commonwealth–State funding arrangements, larger transfers. There is anecdotal evidence that these factors have influenced poor economic performance in Tasmania and South Australia in recent years. FINAL REPORT [145]
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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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CHAPTER 7: Other Federations 7.2 Ve
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CHAPTER 7: Other Federations Sales
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Page 118 and 119: CHAPTER 7: Other Federations FINAL
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Page 144 and 145: CHAPTER 10: Efficiency and Economic
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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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