Commonwealth Grants Commission Research Articles

Australian Federalism in James Buchanan’s Early Work on Fiscal Equity

James Buchanan, one of the founders of public choice theory and constitutional economics, began his career studying fiscal federalism in the doctoral program at the University of Chicago. This paper explores Buchanan’s early interest in Australian experiences with federation and intergovernmental grants as a guide to fiscal federalism in the United States. In his dissertation, Buchanan cited Australia in his arguments against the consolidation of the American states into larger regional governments. He also drew lessons from the early years of the Commonwealth Grants Commission for the intergovernmental grants that he proposed for the United States.

The Art of Sharing: The Richer and Poorer Provinces since Confederation by Mary Janigan

Reviewed by: The Art of Sharing: The Richer and Poorer Provinces since Confederation by Mary Janigan David Tough Janigan, Mary – The Art of Sharing: The Richer and Poorer Provinces since Confederation. Montréal and Kingston: McGill-Queen’s University Press, 2020. 496 p. Historians who study the apparatus of formal democratic participation—the ballot, elections, political parties and the party system, taxes and the welfare state—walk a fine line. Do we engage with the public’s often hazy or heated understanding of the material, in recognition of the importance of democracy as a social practice and in keeping with socio-cultural history’s dictum of meaning-making from below, or with other disciplines’ more technical work on these topics, where an instrumental orientation privileges the perspective of the expert? It’s not our job to fact check our sources. On the subject of provincial equalization, though, most scholars would appreciate the first few pointed paragraphs of Mary Janigan’s The Art of Sharing. She bluntly states that Premier Jason Kenney—an avid proponent of the idea that the province of Alberta whose budgets for which he is responsible suffers unfairly from equalization—knowingly misrepresents the nature of the program as part of a “gospel of grievance” (p. 3). It is an exceedingly well written and carefully argued account of the emergence of equalization over several decades leading to 1957, focusing in particular on the issues arising out of the Great Depression of the 1930s and underlining the instructive role played by early Australian innovations. [End Page 687] Much of the narrative is dominated by the drama and the intellectual heft of the Royal Commission on Dominion-Provincial Relations—the Rowell-Sirois Commission—that was appointed in response to several provincial loan defaults in 1937 and reported in 1940. It proposed introducing a significantly strengthened federal income tax, which was rejected by three provinces. While this is a somewhat obvious place to focus, and has been a touchstone of political history since the report was released, Janigan’s account is resolutely transnational, opening with the presentation of L. F. Giblin, architect of Australia’s Commonwealth Grants Commission, established in 1933, to the Rowell-Sirois Commission in the summer of 1938. From there, she goes back to Confederation, underlining the role of Nova Scotia in particular, both in the 1860s and in the 1920s, in forcing a reluctant federal government to develop a piecemeal system of fiscal transfers to the provinces. What emerges slowly is a more formalized system, free of the vagaries of personality clashes and political vigour, for transferring money to provinces on the basis of need, as determined by an assessment of their ability to raise revenue by way of provincial taxation. (Parenthetically, this is where Alberta, rich in resources and in high incomes, loses out: its governments opt not to use much of its vast fiscal capacity, effectively declining to tax enough to fund adequate public services, while its residents’ contribution to federal taxation go to provinces with legitimate revenue challenges.) Australia, with a comparable historical tension between wealthy and poorer states, is shown throughout as an interested neighbour, comparing notes on how to address issues of fiscal inequality in a federation. Janigan’s prose is forceful yet breezy, and displays the writerly confidence of someone who trusts that her book might be read by people other than professional historians. A lot of research clearly went into the book. Its detailed tracing of the complicated negotiations that led to the establishment of equalization in the 1950s and of the connections between the Rowell-Sirois Commission and the establishment of equalization—not to mention the insistence on the Australian connection—are all markers of an important contribution to an understudied area of political history. Janigan arguably is too fascinated with the character and thoughts of individuals involved in the history, relying a lot on biographies and diaries of Prime Ministers, even ones like Mackenzie King, whose primary contribution to the development of equalization appears to have been delaying it. (Will historiography ever exceed the simple brilliance of F. R. Scott’s poem describing King’s political style: “Do nothing by halves/Which can be done in quarters...

Value capture taxation: alternate sources of revenue for Sub-Central government in Australia

PurposeAustralia’s Future Tax System (2009) among its recommendations identified the need for realignment of tax revenue across the tiers of government in Australia, as well as the need to raise additional revenue from land-based taxes. In achieving these objectives, this paper aims to examine the revenues generated from land and how capital gains tax may be reconceptualised as a value capture tax resulting from the rapid urbanisation of Australia’s cities. The development of a theoretical framework realigns the emerging rationale of a value capture tax, as a means for revenue to be divested from central government in the form of capital gains, to sub-central government as a value capture tax.Design/methodology/approachA qualitative research methodology comprising grounded theory and phenomenological research is used in undertaking the review of tax revenue collection from state land tax, conveyance stamp duty, local government rating and Commonwealth capital gains tax. Grounded theory is applied for constant comparison of the data with the objectives of maximising similarities and differences in these revenues with an analytical construct as defined by Strauss and Corbin (1990, p. 61).FindingsThe paper finds that realigning revenue from land-based taxes against the principles of good tax design provides greater opportunity to raise additional revenue to fund public infrastructure while decentralising revenue from central government. It provides an alternate mechanism for revenue transfer from central to sub-central government while conceptually improving own source revenue from value capture taxation as a new revenue source.Research limitations/implicationsThe limitation of this paper is the ability to quantify the potential increase that would be generated in the form of value capture revenue. It is demonstrated in the paper that capital gains tax took over 15 years for revenue generation to crystallise, a factor that would likely occur in the potential introduction of a value capture tax for funding transport infrastructure.Practical implicationsThe pathway to introducing a value capture tax is through re-innovating capital gains tax as a value capture tax directly hypothecated to funding transport infrastructure that results in the uplift in values of the surrounding property from which revenue is raised.Originality/valueThis paper provides a new approach in contributing to funding the capital outlay of public infrastructure in lieu of central government consolidated revenue allocated through the Commonwealth Grants Commission. It provides a much-needed approach to decentralising revenue from the Commonwealth to sub-central government in Australia which has one of the most centralised tax systems in the OECD.

Optimal Fiscal Equalisation and Its Application to Australia: Updated

The first part of this paper develops a theoretical model of fiscal equalisation to derive an optimal equalisation formula that has general applicability for federations. If vertical equity is achieved by the central government and horizontal equity by interstate migration, the welfare-maximising role of fiscal equalisation is to support an efficient distribution of different labour types across states. The theoretical model further develops work by Boadway and Flatters and by Albouy with some Australian-oriented extensions. Under optimal equalisation, full equalisation is applied when a state government achieves a fiscal advantage by using source-based taxes to raise revenue from non-residents (e.g. mining royalties) or from spreading its fixed costs over a large population. However, efficiency also dictates that equalisation is limited to fiscal advantages arising from differences in state population composition when applied to revenue raised from residents (e.g. via labour or consumption taxes) or to the variable costs of government. Simplifying assumptions are discussed. The second part of this paper applies the optimal equalisation approach to Australia using, as a base, the Commonwealth Grants Commission (CGC) assessments for 2017/18 and 2018/19. 2016 Census data is used to measure the impact of each state’s population composition on its ability to raise revenue from residence-based taxes for use in applying limited equalisation. The gain in consumer welfare of moving from the current Australian full equalisation system to optimal equalisation is estimated. Policy alternatives that are found to be inferior to the current full equalisation system include no equalisation, half-equalisation and the donor relief equalisation schemes recently recommended by the Australian Productivity Commission.

From secessionism to regionalism: The changing nature of territorial politics in Western Australia

ABSTRACTThe development of territorial politics within federal systems over time, specifically change in the nature and intensity of territorial claims, is an understudied question. This article looks at the case of Western Australia (WA) to gain a better understanding of the political dynamics behind changing territorial politics in a federation, more particularly around economic and fiscal policies. In April 1933, grievances surrounding the economic and fiscal policies of the Commonwealth government grew so loud in WA that a referendum on secession saw a majority of voters opting to leave Australia altogether. In the end, not only did WA not secede but the secessionist movement disappeared. Today, ironically, the equalization system, whose formalization through the creation of the Commonwealth Grants Commission one month following the referendum was designed to reduce regional disparities and discontent, is at the centre of regionalist politics in the state.

The end of the mining boom? A Western Australian perspective

Throughout the history of its European settlement, Western Australia (WA) has derived great benefit during its mining boom periods. This was the case with the gold rushes of the late nineteenth and early twentieth centuries. It also occurred in the four decades after 1960 when the state became a major exporter of iron ore, alumina nickel, mineral sands, diamonds and natural gas to Japan, South Korea, Taiwan and other Asian economies as well as its more established production and export of gold into world markets. The present paper assesses developments in the period between 2004 and 2014 and beyond, as the Chinese economy emerged to become WA’s major mineral customer. In relation to other Australian states, it particularly reports on Western Australia’s economic growth rates, per capita GDP, housing price movements, unemployment and workforce participation rates. There is some consideration as well of the public debt challenges recently facing the state. These have been magnified by low levels of return of Goods and Services Tax revenue to Western Australia by the Commonwealth Grants Commission. This is a reflection of the de facto redistribution of WA mining royalties to the other Australian states.

History of Federal–State Fiscal Relations in Australia: A Review of the Methodologies Used

AbstractGovernments of the Australian states and territories differ in their fiscal capacity. For the last 80 years, the Commonwealth Grants Commission (CGC) has provided advice on interstate fiscal transfers. The CGC initially provided advice only on the needs of ‘claimant states’, with the Commonwealth government directly playing an important role in mitigating horizontal (and vertical) fiscal imbalances. Since 1981, however, nearly all general revenue grants from the Commonwealth to the states have been based on recommendations of the CGC. The article is thematically based and examines the range of methodologies that have been used to allocate federal funds to the states since federation and examines their effectiveness.

Estimating the Revenue-Raising Capacities of the States and Territories and the Implications for the Equitable Distribution of GST Revenue

The Commonwealth Grants Commission’s recommended allocation of some $45 billion of GST (VAT) revenue annually to the states and territories is heavily influenced by its estimate of their revenue-raising capacity, which it argues is primarily a function of the value of a jurisdiction’s tax bases. This paper argues that a jurisdiction’s revenue-raising capacity is primarily a function of the real household disposable income of residents after allowances for major cost-of-living differences, such as housing and journey-to-work costs, and tax exportation (the ability to tax non-resident income). Using this measure of revenue-raising capacity, we find that the CGC methodology significantly underestimates the real revenue capacity of the Australian Capital Territory (ACT) and Victoria and significantly overestimates the capacity of Queensland and Western Australia. The paper provides numerical estimates of the differences. The paper concludes that the principles on which the CGC determines the distribution of billions of dollars of funds are flawed and should be reformed.

Does Size Really Matter?

Does Size Really Matter?

Improving Federalism: Drivers of Change, Repair Options and Reform Scenarios

The Academy of Social Sciences in Australia (ASSA) and the Institute of Public Administration Australia (IPAA) hosted a ‘Policy Roundtable on Federalism’ on the 17–18 May 2007 at the University of Canberra. Around 50 attended the roundtable comprising politicians, Commonwealth and state public servants, and academics. The roundtable was provided with a number of background papers including the Hollander‐Patapan article and another produced by staff of the Commonwealth Grants Commission entitled ‘Trends in Commonwealth‐State Financial Relations: a Grants Commission Perspective’. The roundtable focused not only on issues and challenges but, more practically, on options and how to make federalism work better.

The Evolution of Private Financing of Government Infrastructure in Australia—2005 and Beyond

Australian Economic ReviewVolume 38, Issue 4 p. 420-430 The Evolution of Private Financing of Government Infrastructure in Australia—2005 and Beyond Nonie Malone, Nonie Malone Department of Education and the Arts, Queensland The views expressed in this article are those of the author and not those of the Department of Education and the Arts, Queensland. The author has previously provided consultancy services to the Commonwealth Grants Commission on public-private partnerships.Search for more papers by this author Nonie Malone, Nonie Malone Department of Education and the Arts, Queensland The views expressed in this article are those of the author and not those of the Department of Education and the Arts, Queensland. The author has previously provided consultancy services to the Commonwealth Grants Commission on public-private partnerships.Search for more papers by this author First published: 25 November 2005 https://doi.org/10.1111/j.1467-8462.2005.00385.xCitations: 27 A number of interviews were conducted in September 2005 to assist in the preparation of this article. The views expressed were invaluable. In particular, I would like to acknowledge Queensland Infrastructure and Partnerships Division, Queensland Treasury; Southbank TAFE; Standard & Poor's, Melbourne; Brisbane City Council; Department of Education and the Arts, Queensland; Australian Council for Infrastructure Development; Commonwealth Grants Commission; Macquarie Bank; Partnerships Victoria; and New South Wales Department of Treasury. All opinions expressed in this article are those of the author and cannot be attributed to any of the above. AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume38, Issue4December 2005Pages 420-430 RelatedInformation

Fair Division or Fair Dinkum? Australian Lessons for Intergovernmental Fiscal Relations in the United Kingdom

Current arguments in Australia concerning horizontal fiscal equalisation may help inform the debate in the United Kingdom concerning possible changes to the Barnett formula and the establishment of financial relations with any regional governments in England. Although Australia is a long-established federation, with mature institutions for managing the financial aspects of intergovernmental relations, the most populous states are now pushing for a per-capita-based system to replace the existing formula—based on needs and costs—overseen by the independent Commonwealth Grants Commission. This has important implications for the United Kingdom, where the Barnett formula—a per capita system for deciding annual changes in the funding for the devolved administrations—has been increasingly challenged. In particular, the Barnett system has been vulnerable to nontransparent ‘formula-bypass’ agreements. We argue that the status quo in the United Kingdom appears secure as long as England remains a single entity and the UK Treasury sees the financial implications of larger per capita expenditure in Scotland, Wales, and Northern Ireland as relatively small. However, we speculate that regionalisation of government in England would be likely to increase the pressure: to abandon the Barnett system; to look more systematically at need and cost, rather than population, as criteria for allocating funds between governments; and to move towards an Australian-type system. However, the recent experience of Australia also shows that larger states prefer a per-capita-based system allied to more political, less transparent, arrangements to deal with ‘special circumstances’. It may be that a Barnett-type formula would suit the new ‘dominant states’ in a fully federalised United Kingdom which would, ironically, create an alliance of interests between Scotland and London.

Federal-State Financial Relations in Australia: The Role of the Commonwealth Grants Commission

Federal-State Financial Relations in Australia: The Role of the Commonwealth Grants Commission

Payroll Taxes: Thresholds, Firm Sizes, Dead‐weight Losses and Commonwealth Grants Commission Funding*

Payroll‐tax thresholds make firms smaller than they would otherwise be and concentrate firms at just below threshold employment. We estimate the resulting dead‐weight losses under perfect and monopolistic competition. Under monopolistic competition, the threshold‐induced dead‐weight loss in Victoria is approximately 10 per cent of payroll‐tax collections over a wide range of threshold levels. Because payroll‐tax design affects the size distribution of firms, it also affects the Commonwealth Grants Commission's assessment of a State's capacity to generate payroll taxes. This violates a principle of the Commonwealth Grants Commission that its grant to a State be independent of the State's policies.

Fiscal Federalism in Australia

Australia displays high vertical fiscal imbalance (VFI) for historical and constitutional reasons. It also attempts to achieve the highest degree of horizontal fiscal equalization (HFE) to be found in any democratic federation. The Commonwealth Grants Commission (CGC), a non‐partisan body at arm's length from politicians, oversees the regime. A recent report claims that equity, efficiency and transparency would all improve if the regime were abolished. Such a change is politically unachievable, but it raises interesting issues in public finance and public administration, which carry over to other federations and union states.An economically efficient system would: minimize perverse incentives, especially incentives to seek rent; encourage states to grow; discourage suboptimal location decisions; minimize transaction costs. An equitable system would maximize equity between relevantly similar individuals. Aspects of the Australian system that should be copied include the non‐partisan agency and the target of HFE between component parts of the country. Aspects that should be discussed and perhaps copied include the very extensive equalization, including the feature of equalizing away the effects of grants for special purposes. Aspects that should probably not be copied include the cumbersome formulae and some of the perverse methods of calculating for ‘needs’. All abbreviations and acronyms are spelt out in the Appendix on page 37.

Financial Arrangements between the Australian Government and Australian States

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.

The Commonwealth Grants Commission and Horizontal Fiscal Equalisation

The role and approach of the Commonwealth Grants Commission are outlined and put into perspective for the review of Federal financial relations being undertaken by Ross Garnaut and Vince FitzGerald.

The National Gst and Commonwealth-State Financial Relations: A Neglected Issue

While the introduction of the GST continues to dominate economic and political debate in Australia, in terms of its efficiency, equity and compliance cost implications, a neglected but important aspect of the tax reform package focuses on Commonwealth-State financial relations. A central feature of the reform is the replacement of a set of narrowly based and inefficient indirect taxes levied by the Commonwealth and State Governments with the national GST. This is accompanied by substantial reductions in personal income tax rates, giving rise to important implications for the degree of vertical fiscal imbalance (VFI), the efficiency of the States’ tax regimes and the capacity of the States to maintain discretion over their fiscal regimes. The Queensland Government has claimed that the initial State compensation arrangements were grossly inequitable, and that subsequent features of the initiative will impede the Queensland Government’s capacity to maintain its low taxation status.This paper concentrates on the themes of equity, VFI, State tax efficiency and the question of whether Queensland’s days as a low tax State have been ended. Although the degree of VFI can be expected to increase, the elimination of selected State taxes and their replacement with the national GST should facilitate efficiency gains. Moreover, it is concluded that the capacity for the Queensland Government to adjust the remaining components of its tax base, together with the reapplication of the Commonwealth Grants Commission methodology for distributing GST revenues to the States from 2002-03, effectively means that the national GST need not pose a substantial threat to the Queensland Government’s capacity to maintain its low tax status. The paper does not attempt to assess the precise impact of the national GST on the economic performance of particular industries in Queensland, which would require extensive econometric and statistical modelling and is outside the scope of this paper.

Resource requirements to develop a large, remote aboriginal health service: whose responsibility?

In 1994 the Commonwealth funded studies to establish and develop Aboriginal health services. One such study was undertaken in 1995 at Maningrida, Northern Territory: to identify the health-service needs of the population and consider community management structures; to identify Northern Territory expenditure for primary health care; and to provide a three- to five-year development budget. Approximately 2100 Aboriginal residents in the region used the service, including 750 living on 24 outstations within 75 km. Nearly 40 per cent were aged under 15 years. Childhood morbidity was high, with children under two averaging 1.4 hospital admissions per year. The age pyramid reflected premature adult mortality from the third decade of life. Service providers identified inadequate staffing and infrastructure as barriers to service development. Community consultations emphasised the need for resident doctors, improved outstation services and aged and respite care, local training for Aboriginal health workers and housing for staff. These developments would require per capita primary health care expenditure ($872) to be doubled. Aboriginal people in remote areas are disadvantaged through Commonwealth Grants Commission funding formulae and lack of Medicare access. As the sole funding source, the Northern Territory spends over $1.83 million per year providing health services at Maningrida. Additionally, the study proposed that the Commonwealth spend $1.96 million a year over five years on staffing and infrastructure. Local Aboriginal organisations also agreed to allocate resources for health service development. Ineffective implementation, lack of clarification of government responsibilities and funding shortfalls remain barriers to developing remote Aboriginal health services.

A NOTE ON POLITICAL FACTORS IN FEDERAL FISCAL ARRANGEMENTS IN AUSTRALIA

The Commonwealth Grants Commission represents a sophisticated institutional method of dealing with the problem of horizontal fiscal imbalances in Australia, which has managed to combine equity and efficiency considerations without untoward political bias. By contrast, the problem of vertical imbalance has been addressed by specific purpose payments, which are much more amenable to party political calculation, and can thus be employed to maximise electoral support. This note briefly reviews public finance and public choice models of intergovernmental grant determination and shows that a public choice perspective can shed at least some light on how party political factors may influence grants like specific purpose payments.