Fiscal imbalance in Australia
The fiscal imbalance in Australia refers to the disparity between the revenue generation ability of one level of government (in Australia's case, the federal government) in excess of its own spending requirements and the obligations of the other level of government (ie., the States) in providing public services but with limited ability to raise its own revenue. The fiscal imbalance, also called vertical fiscal imbalance is addressed by the transfer of funds from the federal Commonwealth government to state and territory governments, called grants.
Australia also has a horizontal fiscal imbalance which arises because state and territory governments have different abilities to raise funds from their tax bases and because their respective costs of providing public services differ. This imbalance is addressed by a horizontal fiscal equalisation (HFE) policy overseen by the Commonwealth Grants Commission. When the Commonwealth transfers funds to states, it does not give each state a fixed amount or an amount proportional to the state's population relative to other states. Rather, it uses a formula to disburse funds according to which states need it most based on need and ability to raise own-revenue.
Vertical fiscal imbalance in Australia is largely the product of the Commonwealth's takeover of income taxes in World War II and the High Court of Australia's striking down of many state taxes because they were classified as excises, which are reserved for the Commonwealth according to the Australia Constitution.
Specific Purpose Payments
Commonwealth grants to the states are of two types:
- general purpose payments, which states can use for whatever purpose they choose, and
- specific purpose payments (SPPs) (or tied grants), which are grants to states for specific projects decided by the Commonwealth, e.g. schools, hospitals, or roads.
- Fiscal imbalance
- Equalization payments
- Commonwealth Grants Commission
- Council of Australian Governments