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Unformatted text preview: ide service levels according to that community’s
preferences. Some States will choose to have high expenditure/high tax policies. Others will choose policy mixes of low
expenditures and low taxes.
The above analysis relies on the implicit assumption that the State jurisdictional boundaries reflect the different patterns
of community preferences. Sufficient differences exist between say, New South Wales and Victoria, on the one hand,
and Queensland and Western Australia on the other, to suggest that this assumption is not totally unrealistic.
There are various reasons why provision of some types of public service by sub-national jurisdictions will better match
consumer preferences than provision by the national government:
♦ With a multi-level system of government, politicians may have a better knowledge of voters’ preferences; 133 Commission on Fiscal Imbalance ♦ Decentralisation of government may lead to better control of public officials, because the ratio of elected representatives to
public officials is higher; ♦ Electors in sub-national jurisdictions are more likely to be aware of the costs of the provision of public services and so are
more likely to make rational decisions about appropriate levels of public service provision. These decisions are not
obscured by cross-subsidies to or from other jurisdictions. This analysis is embodied in the concept of subsidiarity – that public activities should be carried out at the lowest
government level consistent with efficiency considerations.
In summary, the conclusion of this evaluation is that the IGA arrangements, by significantly increasing VFI to levels way
beyond those existing in any comparable country, will lead to a deterioration in the efficiency of resource allocation in
Australia. Federal Governments of both political persuasions have been willing in the past to defend current levels of
VFI, although the relevant academic literature in both Australia and elsewhere has been virtually unanimously critical of
current levels. There has, however, been no justification advanced by the Federal Government for the increase in VFI
implied by the IGA arrangements. 6. FISCAL EQUALISATION ISSUES An important implication of the Intergovernmental Agreement is that a significantly greater proportion of State receipts
will be the subject of distribution according to horizontal fiscal equalisation (HFE) principles, as recommended by the
Commonwealth Grants Commission. According to Federal Treasury estimates, FAGs of $18.7b. would be distributed
according to HFE principles in 2001-02 whereas under the IGA, GST revenue of approximately $27.5b. would be
subject to HFE distribution, an increase of almost 47%. Effectively, the FAGs fiscal equalisation system has been
extended to apply to all GST revenue. This difference amounts to a little about $8.7 billion in the financial year 2001-02.
The extent of the difference will rise since, the Federal Treasurer has forecast, GST revenues will rise faster than FAGs
would have done (Costel...
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