Vertical Fiscal Imbalance and Horizontal Fiscal Equalisation

Vertical Fiscal Imbalance

  • Refers to the difference between the amount of revenue collected by each level of government and the amount it spends
    • The C’th raises 80% of the revenue, but spends only 50% – they raise far more money than they spend
    • States raise 20%, but spends only 50% – their direct income is much less than their expenditure
    • Thus, large sums of money are transferred between them to rectify the imbalance.
    • However, the C’th uses s 96 to attach conditions to the money
    • LATEST STATS 2014: According to Tony Abbott’s recent speech on this topic, States raise $130 bil but spend $230 bil.
  • Alfred Deakin:

“the rights of self-government of the States have been fondly supposed to be safeguarded by the Constitution. It has left them legally free but financially bound to the chariot wheels of the Central Government’

S 96 enables the C’th to attach conditions to the money it gives, making VFI worse

  • GPG such as GST
  • TG attached to an area of responsibility or government e.g. Health or Education
  • SPG for a specific project e.g. Fiona Stanley Hospital

The Commonwealth can, and has, threatened to withhold funding to coerce the States into complying with policy.

  • Brenden Nelson and Howard on Education (OBE in WA and NAPLAN)
  • Gonski reforms

Effects of VFI

  • Promotes duplication and excessive bureaucracy
  • Increases States’ dependence on the C’th

VFI has come about mostly due to High Court interpretations of the Constitution.

Horizontal Fiscal Imbalance and Equalisation

  • Occurs because States vary in both the capacity to raise revenue and in their expenditure needs
  • Thus, government services in different States may differ widely because of the funding differences, like in the USA
  • This does not happen in Australia because of HFE
  • Some degree of VFI is needed for HFE, which gives money to States based on their ability to provide the same benchmark of services
  • For example, Tasmania may not have enough funding to have the same amount of hospital beds per 1000 people than NSW, and so needs funding from the Feds
  • Allows poorer States to provide services to the level of the other States, but involved a degree of Commonwealth interference.

However in Australia

  • The degree of VFI is excessive for the purpose of HFE
  • May not take into account that States with stronger economies need correspondingly larger expenditures
    • E.g. WA may have a very strong economy but it also needs to spend much more money on infrastructure and services across a vast geographical area.

Grants Commission

  • Established in 1933, it gives the gov’t advice as to how to distribute funding based on the principle of HFE
  • Distribute funds ‘to ensure that each State has the capacity to provide services at national average levels of efficiency.
  • Only gives advice on GPG such as GST





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