Fiscal imbalance in Australia

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The fiscal imbalance refers to the disparity between the revenue generation ability of different governments in a federation relative to their spending obligations, but in Australia the term is commonly used to refer to the vertical fiscal imbalance, the discrepancy between the the federal government's extensive capacity to impose taxes and the obligations of the States to provide public services such as physical infrastructure, health care and education despite only limited capacity to raise their own revenue. The 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 rulings of the High Court of Australia that made various state taxes unconstitutional under the Australian Constitution, in particular sections 90 and 109.

Specific purpose payments[edit]

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.[1]

The ability of the executive to make payments of the latter kind without legislative authority was called into question in Williams v Commonwealth.[2] The High Court held that s 61 of the Constitution, which had commonly been thought to grant the executive unfettered powers to enter into specific purpose payments to the States, did not extent to payments where there was no supporting legislation.[2]

See also[edit]



  1. ^ "Federal-state financial relations (Queensland Treasury)". 2015-03-30. Retrieved 2016-01-26. 
  2. ^ a b "Williams v Commonwealth of Australia [2012] HCA 23 (20 June 2012)". Retrieved 2016-01-26.