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Unformatted text preview: TERGOVERNMENTAL FISCAL
ARRANGEMENTS IN AUSTRALIA
By David J. Collins 1. INTRODUCTION In July 2000 the Australian Commonwealth (i.e. Federal) Government implemented a package of economic reforms of
which the major one was the introduction of a goods and services tax (GST), in reality a VAT, with the revenue from that
tax being earmarked for the States. This change resulted in a major reform in the financial relations between the
Commonwealth Government and the States. This paper provides a review and analysis of the federal fiscal impacts of
the new GST arrangements. It is a briefer and updated version of Collins (2000).
In analysing the probable impact of the introduction of a GST, Australia was able in the planning stages to draw upon the
experience of many countries who have gone through this process. In particular, Australia benefited greatly by drawing
lessons from New Zealand’s experience. However, in this regard the reform of Federal-State financial relations within a
GST implementation package is quite different since there is little available international experience of the introduction of
a GST concurrent with thoroughgoing reform of federal financial relations. The particular implications which the GST
arrangements have for the structure of Commonwealth-State financial relations in Australia have no real counterpart in
the experience of other federal systems.
The Australian federal system has a much higher level of vertical fiscal imbalance than has any other similar country. At
the same time, it has developed its own system of fiscal equalisation to correct for horizontal fiscal imbalance. Both the
level of vertical imbalance and the scope of fiscal equalisation are substantially increased by the GST-associated
changes. From the point of view of federal fiscal relations, the GST changes are close to being revolutionary.
Since so much of the subsequent discussion relates to reform of the Australian Federal-State financial arrangements
existing immediately prior to the introduction of the GST on July 1, 2000, a brief explanation of the relevant components
of these arrangements follows (for a comprehensive exposition and analysis of these arrangements see James, 1992).
The Australian Constitution sets out the expenditure responsibilities and taxation powers of the Commonwealth and the
States, although these have in practice been modified to some extent as a result of the exercise of political and
economic power by the Commonwealth. The overall outcome has been the existence of a high degree of vertical fiscal
imbalance. The States’ own source revenues have proved quite inadequate to fund their own purpose expenditures,
while the Commonwealth is in the opposite position. In practice, the Commonwealth has a monopoly of income tax and
general consumption tax powers. The States are left with a range of relatively unsatisfactory taxes such as financial
taxes, stamp duties, payroll tax, gambling taxes, land taxes and motor vehicle taxes. As a result, the Commonwealth has
made very substantial grants to the States to make up their revenue shortfall.
These Commonwealth grants to the States take two forms:
♦ General revenue assistance (unti...
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