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Efficiency effects of changes in Commonwealth grants to the states : a CGE analysis

Dixon, Peter, Picton, Mark and Rimmer, Maureen T (2005) Efficiency effects of changes in Commonwealth grants to the states : a CGE analysis. Australian Economic Papers, 44 (1). pp. 82-104. ISSN 0004-900X (print) 1467-8454 (online)

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Abstract

This paper describes CSF, a general equilibrium model encompassing factors of relevance to economic efficiency in Federal/State funding including: interstate differences in tax bases and unit costs of State-provided goods; factor mobility; congestion; State-government behaviour incorporating the possibility that governments in subsidised States embark on expenditures with low benefit/cost ratios (flypaper effects); fiscal externalities; and non-discretionary expenditures in each State associated with special national responsibilities. The model is applied to Australia where Federal/State funding is a major political and economic issue. Welfare effects of moving from the present Australian funding system based on fiscal equalisation to a system of equal-per-capita grants are calculated. CSF implies that the welfare gain from this move would be small. The most important source of potential welfare gain is a reduction in flypaper effects. The recognition of congestion externalities can eliminate the small welfare gain, but only under seemingly extreme assumptions. The results are not very sensitive to variations in assumptions concerning population mobility and fiscal externalities.

Item Type: Article
Uncontrolled Keywords: Australia, CGE modelling, CSF
Subjects: FOR Classification > 1403 Econometrics
Faculty/School/Research Centre/Department > College of Business
Faculty/School/Research Centre/Department > Centre of Policy Studies (CoPS)
Depositing User: Ms Julie Gardner
Date Deposited: 30 Apr 2014 07:07
Last Modified: 04 Oct 2015 23:54
URI: http://vuir.vu.edu.au/id/eprint/24594
DOI: https://doi.org/10.1111/j.1467-8454.2005.00250.x
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