Garnaut Fitzgerald Review of Commonwealth-State Funding

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CHAPTER 10: Efficiency and Economic Growth • Even if the average policy setting is correct from a national perspective, is it so for all States (in terms of maximising national welfare) • How can we tell if a ‘myopic’ State policy (which may or may not match the States’ average) is appropriate from a national development perspective It is not possible to give simple answers to these questions. The conditions imposed on States to receive Commonwealth SPPs may help correct for myopic perspectives that may be inconsistent with the long-term national interest. However some argue that the Commonwealth has paid insufficient attention to broad national objectives for SPPs and has allowed the system to be drawn into micro-issues of little national significance. Tendency for equalising transfers to shift resources to lower productivity locations As emphasised by Scott (1950), it should not be assumed that regions are in a long run equilibrium where labour is potentially equally productive wherever it works. Over the long term, there have been significant differences in economic growth between States (although less than in other Federations as shown in chapter 7). While some of this is due to adjustment costs as old industries have lost value and new industries have emerged, these trends are probably indicative of underlying differences in long-term productivity. Equalisation has put more resources into the two lowest productivity States, discouraging the flow of population to more productive regions. More generally flows from equalisation are not correlated with higher productivity (Table 10.2). Similar conclusions can be drawn from the broader analysis of the regional distributional impact of Commonwealth fiscal policies in Chapter 8. TABLE 10.2: GST productions subsidies compared to gross state product and population growth NSW VIC QLD WA SA TAS ACT NT GST subsidy ($ per capita, 2001) -168 -348 166 116 198 922 549 5 330 Growth from 1990–91 to 2000–01 (%) GSP 70 60 84 85 47 37 67 85 Population 11 9 23 17 4 1 9 19 GSP per capita 53 47 50 58 41 36 53 55 FINAL REPORT [148]
CHAPTER 10: Efficiency and Economic Growth International migration International capital flows are a well-recognised feature of the global economy. Any reduction in Australian productivity will make Australia a less attractive place for capital investment (both foreign and domestic) and further reduce national welfare. There is a global marketplace for skilled (high-value) labour. Expert labour seeks out locations around the world where its talents yield the greatest returns. High-value labour and capital from overseas flow to a few cities disproportionately, notably Sydney, Melbourne and Perth in the case of skilled migrants, and these cities plus Brisbane in the case of capital. The systematic transfer of resources from these regions, which are competitive in the global market for capital and high-value labour, reduces Australia’s attractiveness as a national economy within a global system. The slower growth of the places that are globally attractive for capital and labour will reduce resources movement to, as well as purchases of goods and services from, other parts of Australia. The net result could be that growth in States receiving transfers is slower than if the transfers had never been made. International flows of capital and quality labour can be cumulative, resulting in successively larger losses in national per capita output. In the long term, this international leakage is likely to be at least as important as the direct loss of productivity through non-optimal resource allocation within Australia. Incentives for cost reducing reform The CGC’s assessment of expenditure disabilities aims to reflect underlying factors that lead to cost differentials, rather than policy factors. However all disabilities are affected by policy, at least in the medium to long term, as pointed out by Tasman Economics in its submission to the Review. There is a spectrum of policy impacts that ranges from least to most policy affected. • Factors such as geography, climate and demography are inherent disabilities, although the cost effects of these disabilities may be affected by policy. • Commonwealth policy can affect expenditure factors, but is amenable to change over the long term. • State policy can indirectly affect expenditure disabilities in the longer term by affecting the behaviour of State populations (e.g. degree of self-reliance, mobility, risk-taking). • State policy can affect expenditure disabilities directly through longer-term effects (e.g. policies may have longer-term effects on the location, health, social or economic circumstances of communities). • States may choose different organisational and managerial structures. • States may choose between taxation and user charging. While the CGC’s assessments of cost and demand factors can usually be considered policy-independent in the short term, they are unlikely to be independent in the long term. FINAL REPORT [149]
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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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CHAPTER 7: Other Federations The Un
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CHAPTER 7: Other Federations Popula
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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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