Garnaut Fitzgerald Review of Commonwealth-State Funding

GLOSSARY
Efficiency:
allocative efficiency
dynamic efficiency
economic efficiency
productive or technical
efficiency
equity:
horizontal
vertical
expenditure needs
externalities
financial assistance grants
fiscal residuum
flypaper effect
Allocative efficiency occurs when available resources are used to
produce the highest possible value of products for the overall
community. The importance of allocative efficiency is
demonstrated when the application of technical efficiency alone
results in a product of less value to the community than the
resources could produce if used elsewhere.
Dynamic efficiency (versus static efficiency) occurs when
particular arrangements promoting innovation and improvement
may not produce immediate productivity gains but may do so over
time. Some arrangements are superior to others in the dynamic
sense of promoting more productive resource use over time.
Economic efficiency is a measure of the ability of an organization
to produce and distribute its product at the lowest possible cost.
This occurs when no rearrangement of resources will leave
someone better off without worsening the position of others.
Productive or technical efficiency is the use of resources in
producing goods or services to conform with best practice (i.e. not
using resources wastefully).
Horizontal equity refers to the equitable treatment of people who
are equally well off, wherever they live in Australia.
Vertical equity refers to when a policy transfers income,
purchasing power or access to services among Australians, and in
doing so redistributes from richer to poorer individuals or
households.
Differences from average costs of providing and average demands
for State services.
Where the actions of organisations and individuals have an effect
on organisations and individuals other than themselves. In the
case of negative externalities, the external effects are costs on
other people, known as external costs. There may be external
costs from both production and consumption. These can be added
to the private costs to get the total social costs. An example is
pollution, where people other than the firm may bear the health
costs and other problems. In the case of positive externalities the
external effects are benefits on other people, external benefits.
There may be external benefits from both production and
consumption. These can be added to the private benefits to get
the total social benefits.
Tax reimbursement grants to the States distributed by the
Commonwealth Grants Commission from 1942, following the
Commonwealth’s introduction of uniform income tax legislation.
These grants became known as financial assistance grants in
1959. They were later replaced by general purpose grants under
the 1999 Intergovernmental Agreement on Reform of
Commonwealth–State Financial Relations.
The total level of Commonwealth public services and benefits
received, less Commonwealth taxes paid (both directly and
indirectly) by individuals in a region.
When spending and tax decisions made by a government are not
closely in line with the preferences of their households. Money
‘thrown’ at a State Government tends to stick, even though the
welfare of households would be better served if the money were
passed on to them through lower taxes.
FINAL REPORT [230]