Fiscal Transfers in Australia

This paper examines the working of Australia's fiscal transfer system in the context of its long-term evolution, paying particular attention to salient changes that have occurred since the introduction of a comprehensive Goods and Services Tax (GST). The GST has served to increase the vertical imbalance in the system, which was high even prior to this change, by placing more revenue resources with the Commonwealth Government in Australia. In spite of a high degree of expenditure centralisation, considerable emphasis is placed in Australia on achieving horizontal fiscal equalisation through an elaborate mechanism of equalisation transfers, which looks into both revenue and expenditure sides of the state budgets and calculates revenue and expenditure 'disabilities' that account for departures from a pure equal per capita distribution of the shareable amounts. This paper looks at the equity and efficiency implications of the Australian equalisation transfers and considers its relevance for the Indian system, which has many comparable features. Apart from the need for making equalising features of the Indian transfer system more transparent, there is need for emphasising some cost disabilities, particularly those that are structural and exogenous in nature.