RAJ REPORT

Why are services like public transport so bad in CAIRNS if their is Horizontal Fiscal Equalisation (HFE)?—–Should they be the same as BRISBANE if Full equalisation is the objective in Australia. That is, after HFE, each of the six States, the Australian Capital Territory and the Northern Territory (the States) would have the capacity to provide services and the associated infrastructure at the same standard, if each State made the same effort to raise revenue from its own sources and operated at the same level of efficiency. Currently the funds distributed to achieve HFE are the revenues raised from the Goods and Services Tax (GST).

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What is Horizontal Fiscal Equalisation (HFE)?

Horizontal Fiscal Equalisation (HFE) is the making of payments to State governments with the objective of equalising their fiscal capacities to provide public services. It is a feature of the financial arrangements in many federations that aims to reduce the inequalities in the fiscal capacities of sub-national governments arising from the differences in their geography, demography, natural endowments and economies. However the level of equalisation sought varies.

Full equalisation is the objective in Australia. That is, after HFE, each of the six States, the Australian Capital Territory and the Northern Territory (the States) would have the capacity to provide services and the associated infrastructure at the same standard, if each State made the same effort to raise revenue from its own sources and operated at the same level of efficiency. Currently the funds distributed to achieve HFE are the revenues raised from the Goods and Services Tax (GST).

The distribution of GST required to achieve HFE is decided by the Commonwealth Treasurer each year, on the basis of advice provided by the Commonwealth Grants Commission (CGC).

Achieving HFE does not mean that the States are directed how to raise revenue or how to spend their funds. GST revenue grants from the Commonwealth are untied and available for any purpose. Accordingly, HFE equalises fiscal capacity, not fiscal policies which remain for the States to decide for themselves. It does not:

  • result in the same level of services or taxes in all States
  • direct that the States must achieve any specified level of service in any area; nor
  • impose actual budget outcomes in accordance with the Commission’s calculations.
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