Examining Horizontal Fiscal Equalisation in Australia

In 2010-11 over $45 billion GST monies, and about$24b of other grants, will be distributed between the States and Territories on the recommendation of the Commonwealth Grants Commission. The Commission is instructed to implement Horizontal Fiscal Equalisation (HFE); and not to be concerned with efficiency. The paper examines how the CGC pursues fiscal equality, and finds some systematic flaws. The adjustments made by the CGC for demography and mining, but not for wages, undoubtedly reduce inequality in fiscal capacities, from a short-run point of view. However, for payroll tax assessments, the CGC can mistakenly transfer moneys from equals to equals; and disturb an efficient pattern of interstate migration and settlement. The reason is that labour mobility tends to make working households indifferent between jobs in different jurisdictions, with the differences in wage rates compensating for locationally-specific differences in costs of living. In addition to equity flaws, I note some negative efficiency effects, as counterweights to the common claims that HFE improves economic efficiency. Interestingly, HFE in Australia strives for full equalisation of state budget capacities; in contrast, governments attempt only partial equalisation of private budget capacities. I present a framework for considering the trade-off between equality and efficiency, adapted from Brennan and Pincus (2004 and 2010). The main result is that little or no allowance should be made for interstate differences in unit costs of public provision of (public or private) goods and services. An alternative distribution of GST monies is estimated for 2010-11.fiscal equalization, Australian fiscal policy

Environmental economics and the Murray–Darling: Comment

Resource /Energy Economics and Policy,

The L2H2 Auction: Efficiency and Equity in the Assemblage of Land for Public Use

The burden of redevelopment projects, whether or not they ultimately benefit the communities in which they are undertaken, is borne disproportionately by those displaced. Neighborhoods are destroyed and residents are made to leave a home they love, compensated only by its market value. The benefits and costs of redevelopment can only be estimated since there are no direct market tests. Here a mechanism, developed as an extension of two recent papers, by Lehavi and Lichts (L2) and by Heller and Hill (H2), provides a market-based efficiency test for a proposed project and a compensation rule that alleviates the disproportionate burden on displaced residents. Assembled property is sold at an auction. The reserve price (the lowest price at which the assembled property will be sold) is set so that all displaced residents receive at least their personal value of their property. A successful bid, one that claims the assembled property, is sufficient proof of efficiency.

From the Australian Settlement to Microeconomic Reform: the Change in Twentieth Century Policy Regimes

This paper outlines and discusses explanations of the substantial shift in the economic policy regime in Australia. The first regime held from federation through the 1970s. It focused on extensive development, through the attraction and retention of selected immigrants by a set of mutually-supportive policies centered on trade protection. The second strategy, of recent vintage, concentrates more on intensive development and, in contrast with the earlier, relies on economic competition, rather than attempting to suppress it. Similar shifts in policy regimes have occurred in other countries, but with different timing and character. In the Australian case, there was bi-partisan support for the claims that liberalization was a desirable response to the changed external economic environment.

Efficiency and Equity in the Use of Eminent Domain, with Local Externalies

In Shapiro and Pincus (2008), we proposed a method for arriving at just compensation of private owners of urban land, in cases like Kelo v New London, in which government has plans to use eminent domain to `take' private properties, to be assembled into a single parcel for some public purpose. The required quantum of just compensation can be discovered when the public purpose is to be pursued via private use of the assembled land parcel, and when the private user can be selected through an auction of the assembled land. This paper extends the auction mechanism to include properties which lie outside the area `taken' or resumed by government, but which will be affected by the new use made of the assembled area. The auction provides an efficiency test: does the proposed change in use increase the aggregate value of the land to be resumed plus the affected properties? Local externalities are internalised through the auction. We briefly discuss the political economy of the mechanism.

The Australian Constitution: What Should Economists Do?

social behaviour; economic aspects; trade; expectations