Draft report

The Productivity Commission has been asked to undertake an inquiry into Australia’s system of horizontal fiscal equalisation (HFE) as the basis for the distribution of GST revenue to the States and Territories (hereafter States). The Productivity Commission is to consider the influence the current system of HFE has on:

• productivity, efficiency and economic growth, including the movement of capital and labour across state borders

• the incentives for the States to undertake fiscal (expenditure and revenue) reforms that improve the operation of their own jurisdictions, and

• the States’ abilities to prepare and deliver annual budgets.

Moreover, the inquiry poses the questions of whether the current system of HFE is in the best interests of national productivity and whether there may be preferable alternatives.

Much of the debate about HFE in Australia stems from confusion and disagreement about its objective. Clear specification of objectives is important for policy issues where there are trade-offs, and a clear objective is essential for assessing the effectiveness of the system, now, and for any future changes.

With that in mind, the Productivity Commission has assessed the current HFE system and any proposed alternatives against an objective for HFE that takes account of equity, efficiency and simplicity. Our approach is focused on the Australian community as a whole, and is not framed solely in the interests of any individual State (as required under the Productivity Commission Act 1998 (Cwlth)).

Submissions on this draft report can be made until Friday 10 November 2017.

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