Australian fiscal federalism: An empirical note of long-term trends in state and local government finance, 1969/70 to 1994/1995

Abstract

Australian fiscal federalism is characterised by vertical fiscal imbalance, with revenue-raising powers vested mainly in the Commonwealth government and expenditure functions falling largely on state and local governments. Historically a system of intergovernmental grants has been employed to address the problem of vertical fiscal imbalance. Empirical analysis of trends in state and local government funding over the period 1969/70 to 1994/95 shows two clear trends. Firstly, Special Purpose Payments (SPPs) have risen relative to General Purpose Payments (GPPs) in Commonwealth government grants, which may have diminished the autonomy of state and local governments. And secondly, state and local governments have experienced a relative decline in Commonwealth grant income and have raised an increasing proportion of their income from own source income. Despite being economically inefficient, this may have acted as a countervailing influence to increased reliance on SPPs.