The economic impacts of horizontal fiscal equalization as practised in Australia

Abstract

This chapter examines the economic impacts of horizontal fiscal equalization (HFE) as it is practised in Australia. It also discusses the benchmarking arrangements in place to ensure accountability between levels of government. The overall assessment finds Australia’s comprehensive approach to HFE is functioning reasonably well. It achieves a high degree of fiscal equality, the institutional arrangements and processes for determining the goods and services tax (GST) distribution are robust and independent and provide a degree of predictability for state budgets. However, there are deficiencies which have recently become particularly pronounced. The HFE system is not policy neutral, notably for major tax reform and the efficient taxation and extraction of some mineral and energy resources. Too little weight is afforded to the importance of fairly rewarding effort and the system’s fiendishly complex methodology is poorly understood, and risks undermining accountability for decisions and public confidence in the system.