Garnaut Fitzgerald Review of Commonwealth-State Funding

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CHAPTER 1: Overview and Summary of Recommendations A number of questions relevant to assessing current patterns of Commonwealth–State funding were identified in Issues in Commonwealth–State Funding (Garnaut and FitzGerald 2002). The primary question is: how equitable are Commonwealth–State transfers in terms of their effects on the vertical distribution of income among individuals and households. The National Centre for Social and Economic Modelling (NATSEM) was commissioned to analyse these issues. NATSEM’s report, The Distributional Impact of Selected Existing Commonwealth Outlays and Taxes and Alternative Commonwealth Grant Allocation Mechanisms (Harding et al. 2002), was presented at the National Forum and is available on the Review’s website. NATSEM compared the vertical equity impacts of the existing grant allocation system with those of other Commonwealth fiscal interventions, including major impacts of the social security system and income tax. It also compared alternative systems of distributing Commonwealth funding among the States, according to State of origin of the revenue and an equal per capita basis. There does not appear to be an ‘equity’ case for distributing grants to the States beyond the effect it has on income distribution among individuals and households in Australia. Simplicity, transparency and accountability The terms of reference related to simplicity and transparency are straightforward. We think that accountability of governments to the electorate requires simplicity and transparency, and so discuss these three criteria together in the Report. 1.5 Overall assessment of current arrangements The Australian Federation is now a deeply integrated economic entity, with complex redistribution of resources, incomes and fiscal capacity among the States. Transfers of resources among States associated with Commonwealth payments to them are smaller than transfers associated with general taxation and social security. Australia’s progressive taxation and social security systems enhance incomes and activity in Tasmania and South Australia and restrict them in some other States, more than the pattern of Commonwealth payments to the States (see Chapter 8). These transfers through general mechanisms are highly progressive at a household level, and reflect community values expressed through the national electoral process. This Review is concerned with Commonwealth payments to the States. Transfers associated with these payments are smaller than transfers resulting from the social security and tax systems, both in size and importance to equity, but are nevertheless an important part of the national economy. The Review has examined the ways the established pattern of Commonwealth payments to the States affects national economic performance. Overall, Commonwealth payments impose a substantial static resource misallocation cost on the Australian economy, at a potential cost of several hundred million dollars per year. FINAL REPORT [12]
CHAPTER 1: Overview and Summary of Recommendations The improved Australian economic performance of the past decade is widely recognised as emerging from many reforms to remove arrangements that have caused resource misallocation. In this context, calculation of static resource misallocation costs suggests that reform of Commonwealth payments to the States is a medium-sized reform: somewhere between the larger effects of A New Tax System in 2000 and the substantial but more modest effects of the reduction in motor vehicle protection recommended by the Productivity Commission in 1997. Economic gains from efficiency raising reform are greater than suggested by economic analysis, due to the reallocation of a fixed amount of resources among activities of varying economic value. Additional gains from economic reform may come from changes in incentive patterns that affect the total amount of resources (e.g. changes leading to the inflow of capital or skilled labour, or to greater commitment to education and other means of increasing human capital). Gains may come from changes in incentive patterns affecting the intensity of the search for more productive ways of using resources, or the intensity with which resources are applied to increasing output. Some economic reforms have a powerful dynamic effect through the pressures they apply to Government policy making, leading to other efficiency raising reforms. Opening the Australian capital and goods markets to international competition in the late 20th century is generally considered to have had powerful dynamic effects of this kind. The dynamic effects of Commonwealth–State financial relations on economic performance would seem to be particularly important. The current arrangements inhibit growth through dynamic processes in several ways: (1) State Governments have reduced incentives to pursue growth-enhancing policies because of systematic equalisation of the revenue costs and benefits of growthenhancing or growth-inhibiting economic policies. (2) Efforts to improve efficiency in service delivery are diminished because payments depend on each State demonstrating that its costs of delivering services are above average. (3) Blurred lines of responsibility between the Commonwealth and the States for funding and delivering services reduce accountability and the focus on performance. (4) The current arrangements contain disincentives for Australia’s largest cities to accept high levels of immigration, including through the under-investment in urban infrastructure that has been placed under stress by high levels of immigration. In addition, there are signs that the exceptionally large role of the public sector and exceptionally small role of the private sector in some States that are large recipients of transfers, notably Tasmania and South Australia, have changed the political orientation in ways that are unfavourable to growth. These effects are difficult to quantify. However, a systematic tendency for the recipient states of Tasmania and South Australia to give higher priority to social and environmental development objectives and lower priority to economic development objectives – relative to the donor States – is apparent in recent attempts at grading State policies (Evatt Foundation 2001). The effects of the current arrangements on equitable distribution are less clear-cut. The concept of equity does not have much meaning when applied to States as entities, independently of individuals and households within the States. At the level of income distribution, taxation burden, and individual and household access to Government services, Commonwealth payments to the States change the distribution without making it significantly more or less equitable. If anything, there is a weak tendency for the current arrangements to shift benefits from relatively poor to relatively rich Australians. FINAL REPORT [13]
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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 The Un
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CHAPTER 7: Other Federations Popula
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CHAPTER 7: Other Federations 7.4 Co
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CHAPTER 7: Other Federations In add
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CHAPTER 7: Other Federations Compar
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CHAPTER 7: Other Federations FINAL
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CHAPTER 8: Federal Policy Effects o
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CHAPTER 9: Equity Chapter 1 notes t
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CHAPTER 9: Equity Both SPPs and gen
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CHAPTER 9: Equity Table 9.3 shows t
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CHAPTER 9: Equity 9.3 Horizontal di
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CHAPTER 9: Equity Many ways to rais
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CHAPTER 10: Efficiency and Economic
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CHAPTER 11: Simplicity, Transparenc
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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 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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