As a Treasury officer who spent considerable time advising on Commonwealth/ State financial relations, I continually regret the failure of most commentators to understand the unique (in the world) system of fiscal equalisation established under the Grants Commission. This is not the place to delve into the history or details of the economic aspects of the system.
But as someone who normally supports policies based on free markets, it is pertinent to suggest that this interference with such policies has a worthwhile political objective viz it provides an important basis for maintaining the federal system of government which Australia has hitherto successfully pursued despite on-going attempts by both major parties to centralise decision-making on health, education, etc policies in Canberra. While it may be stretching the analogy, it is worth adding that had such a system been established in the USA, some of the disastrous internal disputes that have occurred there might have been lessened, even avoided altogether. In my view the ongoing interference by our federal government with the operation of the fiscal equalisation system (by directing the Grants Commission to distribute federal grants according to political decisions in Canberra) endangers our federal system.
Des Moore
State service levels differ
letter published in The Australian Financial Review, 23 May 2012
Your analysis of fiscal equalisation is wide of the mark (“Fiscal union averts euro-style disaster”, May 19-20).
For Australia, the Commonwealth distributes the goods and services tax so that each state can provide services at the same standard if each makes the same effort to raise revenue and operates at same efficiency levels.
But this doesn’t mean that “wherever people live they are supposed to get the same level of services”: actual service levels are principally determined by the respective state governments.
Thus Tasmania can provide the same level of services as other states if it makes a similar effort to raise state taxes and operates efficiently.
But if its government decides to offer a lower than average standard of services, in principle this does not adversely affect its level of grants.
This system may deter investment in states with higher per capita incomes and with operations at higher levels without fiscal equalisation and hence no subsidies to states with lower incomes.
But note that, if the Commonwealth took over the running of state services, those services would likely be provided at a similar standard across Australia.
Although adoption of Australia’s fiscal equalisation approach would significantly reduce the euro zone problem, existing differences in capacities and standards of services and taxes as between European countries would likely require subsidy levels from higher to lower per capita income countries that would be politically impracticable.
Unless there is a move back in Europe to single currencies and monetary policies there will be continuing financial crises there.
Des Moore Institute for Private Enterprise South Yarra Vic