What does this mean for Australia? OECD experience provides some lessons on and for how to operate ‘dos don’ts’ Australia’s HFE scheme. Many of the lessons from overseas experience are already embodied in system of HFE. Australia’s Avoid the use of a narrow representative tax base in assessing revenue raising capacity. Moving averages are valuable in reducing volatility in the level of transfers and, as a result, providing budget stability for subcentral governments. Avoid tied equalisation payments. Take account of broader conditional transfers. An independent grants commission provides less room for political manipulation of fiscal transfers. Other lessons suggest system could be improved. Australia’s Avoid where possible high tax as they can create incentives for ‘equalisation rates’, subcentral governments to the system and can create development traps. As ‘game’ shown in chapter 4, system can result in high equalisation tax rates in some Australia’s circumstances (for example, increases in a tax base or changes to mineral royalty rates). Changes to equalisation arrangements must be accompanied by building political buyin by subcentral governments to ensure that those changes are enduring. Building societal understanding and consensus is vital in setting and adhering to whatever standard of equalisation is chosen to be at the heart of any HFE arrangement. Some of these lessons are picked up in chapter 9, which brings together the threads of earlier chapters in a discussion of how system of HFE might be improved to better Australia’s achieve its objectives. 8.1 Fiscal equalisation to address disparities in the fiscal capacity of subcentral governments is common among OECD countries. But other approaches to countries’ fiscal equalisation are inextricably linked to their unique institutional frameworks this — limits those applicability to Australia. schemes’ Despite this, overseas experience provides lessons that can inform the elements of our system in order to better meet the objectives of our fiscal equalisation scheme. Australia is the only OECD country with a federal government that totally eliminates disparities in fiscal capacity between subcentral governments.
What does this mean for Australia? OECD experience provides some lessons on ‘dos and don’ts’ for how to operate Australia’s HFE scheme. Many of the lessons from overseas experience are already embodied in Australia’s system of HFE. Avoid the use of a narrow representative tax base in assessing revenue raising capacity. Moving averages are valuable in reducing volatility in the level of transfers and, as a result, providing budget stability for subcentral governments. Avoid tied equalisation payments. Take account of broader conditional transfers. An independent grants commission provides less room for political manipulation of fiscal transfers. Other lessons suggest Australia’s system could be improved. Avoid where possible high ‘equalisation tax rates’, as they can create incentives for subcentral governments to ‘game’ the system and can create development traps. As shown in chapter 4, Australia’s system can result in high equalisation tax rates in some circumstances (for example, increases in a tax base or changes to mineral royalty rates). Changes to equalisation arrangements must be accompanied by building political buyin by subcentral governments to ensure that those changes are enduring. Building societal understanding and consensus is vital in setting and adhering to whatever standard of equalisation is chosen to be at the heart of any HFE arrangement. Some of these lessons are picked up in chapter 9, which brings together the threads of earlier chapters in a discussion of how Australia’s system of HFE might be improved to better achieve its objectives. 8.1 Fiscal equalisation to address disparities in the fiscal capacity of subcentral governments is common among OECD countries. But other countries’ approaches to fiscal equalisation are inextricably linked to their unique institutional frameworks — this limits those schemes’ applicability to Australia. Despite this, overseas experience provides lessons that can inform the elements of our system in order to better meet the objectives of our fiscal equalisation scheme. Australia is the only OECD country with a federal government that totally eliminates disparities in fiscal capacity between subcentral governments.
horizontal-fiscal-equalisation-draft.docx