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Unformatted text preview: paper. However, as a result of the mechanisms implemented in
the IGA for approval of changes in the GST tax rate and base definition, the States now have some influence, albeit
negative, over the conduct of fiscal policy.
The IGA mechanism which grants each State the power of veto over rate or base changes effectively means that, unless
the Federal Government is willing to break the Agreement, it will not be possible to change the GST rate and changes in
the base may also prove difficult. This aspect of the IGA seems to have met with almost universal approval, as a result
of a generally expressed fear that GST rates almost inevitably rise beyond their initial level at implementation. There
seems ample evidence to confirm the validity of these fears (see, for example, Tait, 1972).
This does, however, seem a poor basis upon which to sacrifice a major tool of macroeconomic policy. Furthermore, it
now appears impossible to implement any further tax mix change towards increased reliance on consumption taxes. It is
likely to be very difficult to expand GST revenue to fund further reductions in the scope of discriminatory State taxes.
The GST rate change mechanism has been set up for political reasons. It would be difficult to justify it on the basis of
efficient macroeconomic policy-making or rational tax policies. Given that Australian governments appear to have
philosophical objections to raising personal income tax rates, taxation as a tool of Australian fiscal policy appears now
to have been largely compromised. 5. VERTICAL FISCAL IMBALANCE ISSUES The term vertical fiscal imbalance (VFI) relates to a mismatch for an individual level of government (federal, state or
local) between its revenue-raising powers and expenditure responsibilities. To be more specific, VFI implies a mismatch
between a particular level of government’s own-source revenues (not including grants from other levels of government)
and own-purpose expenditures (not including grants to other levels of government). This concept is very clearly
illustrated for the case of Australia in Table 15 below.
VERTICAL FISCAL IMBALANCE, AUSTRALIA, 1993/94 TO 1998/99
1993/4 1994/5 1995/6 1996/7 1997/8 1998/9 %
1.01 Proportion of Total-Own Source
Proportion of Total Own-Purpose
Source: Collins (2000). 130 Commission on Fiscal Imbalance This table shows that:
♦ The Commonwealth consistently raises over 70% of total own-source revenues raised by all levels of government in
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