Are there alternative approaches? The Productivity Commission has been asked to consider whether there are preferable alternatives to the present approach to equalising fiscal capacities. States’ The proposed revised objective equalisation to a reasonable standard Commission’s — — strongly suggests that alternatives to the present system are needed. The consideration of alternative approaches covers two broad types. Commission’s The first involves changes to the way fiscal capacities are assessed, to achieve ‘in system’ greater efficiency (policy neutrality), and transparency and accountability in the system. The second involves use of alternative equalisation benchmarks, which could more holistically address some of the problems identified and achieve broader efficiency and fairness benefits. Both approaches, and the specific options within them, variously trade off equity, efficiency, and transparency and accountability. The tradeoff between equity and efficiency is an inescapable consequence of HFE and of any move away from a equalisation ‘precise’ approach to a reasonable standard that injects greater fairness and efficiency into the system. To be to current arrangements, alternative approaches would need to address the ‘preferable’ concerns identified above and still provide States with the fiscal capacity to deliver a reasonable standard of services to their communities (in line with the Productivity proposed objective for HFE). Commission’s Better to assess State fiscal capacities ‘in system’ ways The Commission considered several ways of assessing fiscal capacities. These States’ included, discounts for individual revenue categories, targeted discounts for specific policy decisions, and the use of broad indicators and category level indicators to assess State revenue raising capacities and expenditure needs. At first pass, some of these options appear to offer prospective benefits, such as broad indicators and targeted discounts, but on balance are not workable or pose too great of a risk to fiscal equality (they may not achieve a level of equalisation). ‘reasonable’ Use of simpler and more policyneutral categorylevel indicators hold the most promise but can only go so far in addressing the problems with the HFE system. Discounts for mining or other revenue categories are hard to justify Discounting entire revenue categories, such as mining revenue or stamp duty, could be used to address policy nonneutrality concerns. This approach would guarantee that a State retains
Are there alternative approaches? The Productivity Commission has been asked to consider whether there are preferable alternatives to the present approach to equalising States’ fiscal capacities. The Commission’s proposed revised objective — equalisation to a reasonable standard — strongly suggests that alternatives to the present system are needed. The Commission’s consideration of alternative approaches covers two broad types. The first involves ‘in system’ changes to the way fiscal capacities are assessed, to achieve greater efficiency (policy neutrality), and transparency and accountability in the system. The second involves use of alternative equalisation benchmarks, which could more holistically address some of the problems identified and achieve broader efficiency and fairness benefits. Both approaches, and the specific options within them, variously trade off equity, efficiency, and transparency and accountability. The tradeoff between equity and efficiency is an inescapable consequence of HFE and of any move away from a ‘precise’ equalisation approach to a reasonable standard that injects greater fairness and efficiency into the system. To be ‘preferable’ to current arrangements, alternative approaches would need to address the concerns identified above and still provide States with the fiscal capacity to deliver a reasonable standard of services to their communities (in line with the Productivity Commission’s proposed objective for HFE). Better ‘in system’ ways to assess State fiscal capacities The Commission considered several ways of assessing States’ fiscal capacities. These included, discounts for individual revenue categories, targeted discounts for specific policy decisions, and the use of broad indicators and category level indicators to assess State revenue raising capacities and expenditure needs. At first pass, some of these options appear to offer prospective benefits, such as broad indicators and targeted discounts, but on balance are not workable or pose too great of a risk to fiscal equality (they may not achieve a ‘reasonable’ level of equalisation). Use of simpler and more policyneutral categorylevel indicators hold the most promise but can only go so far in addressing the problems with the HFE system. Discounts for mining or other revenue categories are hard to justify Discounting entire revenue categories, such as mining revenue or stamp duty, could be used to address policy nonneutrality concerns. This approach would guarantee that a State retains
horizontal-fiscal-equalisation-overview.docx