State expenditure and fiscal illusion in Australia: A test of the revenue complexity, revenue elasticity and flypaper hypotheses

Abstract

Despite the federal structure of its constitution, no empirical study of fiscal illusion at the level of state expenditure has yet been undertaken in Australia. This paper seeks to go at least some way towards remedying the omission by subjecting the revenue-complexity, revenue-elasticity and flypaper hypotheses to pooled time-series, cross-sectional analysis of seven Australian states and territories for the period 1982 to 1992. The results obtained indicate that some support is provided for the revenue-complexity hypothesis, strong evidence exists for the flypaper effect, and virtually no empirical backing was found for the revenue-elasticity hypothesis. These results correspond with earlier work elsewhere on fiscal illusion at the level of the state.