No. 3 - Department of Treasury - The Western Australian Government

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Western Australian Economic Summary2006 No.3Put simply, the job creation impact of a project seeking a subsidy is oftenpresented, but the job destroying impact of commandeering money fromother taxpayers to support the project is never included. This one sidedpresentation has been likened to ‘single entry bookkeeping’ (HooverInstitution, 2006).Just as with input-output multipliers 1 , accounting for the benefits of aproject without the costs of attracting the project can only ever produce apositive result. It is effectively a one-sided analysis 2 .The need to examine the budgetary impacts has long been recognised byCGE modellers. For example, in some of the earliest examples ofexogenously adding a project to the economy in a CGE model, the Centre forRegional Economic Analysis (CREA, 1990, p. 12) accounted cuts in otherpublic 3 consumption required to fund the Very Fast Train project in NewSouth Wales and Victoria, while Dixon, Horridge and Johnson (1992, p. 273)did likewise for the Multi-Function Polis in South Australia. However, thistechnique seems to have become less common as the technique of addingprojects to the economy in CGE models has become more popular.Project proponents have often argued that the addition of a project willgenerate more than enough revenue to cover its additional cost to thebudget. The CGE framework is perfect for testing this claim through abalanced budget closure.The costs modelled should include both the direct costs, such as the subsidyrequired to attract the project, and the indirect costs, such as additionalexpenditure on the State Government health system required to support ahigher population.It could be argued that these are ‘good’ costs as they are associated witheconomic growth. They are, nevertheless, costs that must be accounted for.Worthwhile projects will generate more benefits (economic and fiscal) thanthe total costs generated by the project.1 Input-output multipliers are widely regarded as discredited and should not be usedunder any circumstance (DTF, 2002, pp. 49-50).2 This term can be attributed to Greg Watts of the Queensland Office of Economicand Statistical Research in a conversation with the author.3 This analysis also imposed reduced private consumption in the short run as it waslargely financed by the private sector.82 Department of Treasury and Finance
2006 No.3 Western Australian Economic SummaryThe usual way to implement ‘double entry bookkeeping’ in a CGE model isto fix the cash budget balance or net cash-borrowing requirement of themodel being used 1 , and leave either a tax rate (e.g. payroll tax) or aparticular type of government expenditure (e.g. transfers to households orgovernment consumption 2 ) free (endogenous) to adjust to the level requiredto produce the calculated budget outcome 3 .The budget balance can then be shocked to the level required to pay for thesubsidy in the years that repayments are needed. This can be an ongoingsubsidy, but does not have to be the same year in which the expenditureoccurs – for example the public debt created from capital expenditure can bepaid off over a number of years.Include the Impact of the Commonwealth GrantsCommissionThe Commonwealth Grants Commission (CGC) is tasked with distributingGoods and Services Tax (GST) revenues amongst the States and Territoriesaccording to the principle of fiscal equalisation 4 . According to the CGC,fiscal equalisation states that:each State should be given the capacity to provide the average standard ofState-type public services, assuming it does so at an average level ofoperational efficiency and makes an average effort to raise revenue from itsown sources.CGC, 2006Broadly speaking, a State’s share of GST grants will increase when itsnational population share increases 5 , but will fall when its own sourcerevenue raising capacity rises 6 . Increases in expenditure needs (such ashigher cost of service delivery to remote areas) will also lead to a highershare of GST grants 7 .1 This is different to fixing the total budget balance. See Layman (2006, p. 20) forfurther detail. All revenue, expenditure and budget variables are reported in cashaccounting terms.2Government expenditure is preferred, as this does not violate thesavings/investment assumption of most CGE models (Layman, 2006, pp. 19-20).3 Government administrative costs required to examine and implement the subsidyshould also be included (Layman, 2006, p. 20).4 Formally, the CGC advises the federal Treasurer who distributes the grants.5 As compensation for an increase in expenses associated with a higher populationshare.6 Based on an equal effort to raise taxes from its tax base.7This analysis ignores Specific Purpose Payments, which could grow withpopulation.Department of Treasury and Finance 83
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No. 3 - Department of Treasury - The Western Australian Government

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