Financial Arrangements between the Australian Government and Australian States

Abstract

Vertical fiscal imbalance rapidly emerged as a structural feature of Australian federalism. Commonwealth transfers to the states have been used to overcome the imbalance, including untied assistance to the states, specific purpose payments to the states and direct expenditure in the states. Vertical transfers also address horizontal imbalances among the states, using per capita relativities recommended by the Commonwealth Grants Commission. The complex arrangements that result have been criticized on a number of grounds, including efficiency, incentive structures, the degree of central intervention, inequity, cost and complexity. However, the system is successful in achieving complete equalization of the financial capacity of the states to provide an average level and standard of services, and it takes account of both expenditure and revenue needs. Having an independent body – the Commonwealth Grants Commission – to provide technical advice also increases public confidence in the system.