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Fiscal Equalisation

What is fiscal equalisation?

Horizontal fiscal equalisation (HFE) is the transfer of fiscal resources between jurisdictions with the aim of offsetting differences in revenue raising capacity and the cost of delivering services. Its principle aim is to allow sub-national governments to provide similar standards of public services at a similar tax burden.

Do other countries have fiscal equalisation schemes?

Most federations have some form of HFE but there is considerable variation in the extent to which equalisation seeks to reduce fiscal disparities. It is widely acknowledged that Australia has the most full and comprehensive arrangements.

Why do State fiscal capacities differ?

Differences among the States in economic, social and demographic characteristics affect their expenditure and revenues, and contribute to differences in fiscal capacities. The main reasons for differences in States' fiscal capacities are mining production, property sales, taxable payrolls, remoteness, Indigenous status, population growth, community size (costs associated with big cities and very small communities), diseconomies of small scale, natural disasters and employee costs.

Is a State required to spend its GST revenue on the service needs that drive its GST share?

The Commission’s role does not involve forming an opinion on how much a State should spend on any particular service it provides to its population, nor on how much tax it should raise under the revenue heads available to States. The Commission does not have a view on how a State should spend its GST revenue. 

One of the principles that the Commission applies in assessing the funding needs of States is to reflect what States do. The Commission observes the range of services that States provide and collects data on how much it costs States to provide those services, given the circumstances of each State. From those data, it is able to derive an Australian average standard of service for each service sector. The Commission then looks at the fiscal capacity of each State – what it is capable of raising from its own revenue sources and receives from the Commonwealth in specific payments – and identifies the funding shortfall that each State has between that fiscal capacity and what it would require to be able to provide that Australian average standard of service. The aim of HFE is to provide each State with the fiscal capacity, through the distribution of GST revenue, to provide the same standard of service as every other State. Our work should not be understood as identifying the desired level of spending that each State should fund for particular services.

The GST revenue provided by the Commonwealth is general revenue assistance – that is, it is an established part of the federal financial agreements between the Commonwealth and the States that GST revenue is untied and each State can spend in accordance with its own spending priorities. States are accountable to their electorates and not to the Commission or the Commonwealth more generally, for how GST revenue is spent.

What happens during an update?

Each year the CGC is asked to update its estimates of States' relative fiscal capacities to inform the GST distribution. This is to ensure that the distribution reflects changes in State circumstances. This following document explains the processes used by the Commission in preparing an update.

Update processes (PDF 529KB) Update processes (DOCX 264KB)

How does the CGC bring together information to measure the relative fiscal capacity of the States?

The formula used to bring together information used to measure the relative fiscal capacity of the States is called the distribution model. The following document sets out that model and explains the steps involved.

The GST Distribution Model (PDF 493KB) The GST Distribution Model (DOCX 551KB)

Presentations on CGC processes

These documents provide a brief overview of how the CGC determines States’ relative fiscal capacities and describe the process of horizontal fiscal equalisation.

How the CGC does its job (PPTX 295KB) How the CGC does its job (PDF 2.3MB)
Introduction to fiscal equalisation in Australia (PPTX 367KB) Introduction to fiscal equalisation in Australia (PDF 1.7MB)

History of fiscal equalisation in Australia

Horizontal fiscal equalisation has a long history in Australia. Upon federating, the six colonies of Australia ceded the right to impose and collect customs and excise duties (the dominant source of public revenue at the time) in favour of the Commonwealth. This created a vertical fiscal imbalance (VFI) and led to various general revenue-sharing schemes with the States. In addition, special grants were made to the fiscally weaker States — Western Australia, Tasmania and South Australia — largely on an ad hoc basis.

In 1933, following the threat of Western Australia’s secession, the Commonwealth Grants Commission (CGC) was established to make recommendations on these special grants. This was done on the basis of making it possible for a claimant State ‘by reasonable effort to function at a standard not appreciably below that of other States’. During the Second World War, the Commonwealth assumed sole responsibility for collecting income tax. This significantly exacerbated VFI and necessitated a greater level of general revenue sharing with the States. In the post‑war period, specific purpose payments also became more important as a means of providing financial assistance and influencing the delivery of services and infrastructure within States. In contrast, the significance of horizontal equalisation achieved by way of special grants recommended by the CGC gradually declined. South Australia, Western Australia, Tasmania and Queensland entered and withdrew from claimancy at various times between 1960 and 1975.

A major change occurred in the mid to late 1970s. Financial assistance grants (to address VFI) were replaced by income tax sharing arrangements, and the Premiers’ Conference of April 1977 decided that revenue under this arrangement was to be distributed on the basis of relativities based on equalisation principles. This meant that the same funding source was being used to address vertical and horizontal fiscal imbalance, and the CGC’s recommendations affected the finances of all States, not just the claimant States. The distribution of funding was allocated so that each State could provide government services at standards not appreciably different from the standards of government services provided by the other States. The CGC has been recommending relativities based on full equalisation since 1981.

Another significant change occurred with the introduction of the GST in 2000. The GST replaced financial assistance grants and various state taxes, and the GST pool was to be returned to the States according to the principle of HFE. It meant that the Commonwealth no longer had any substantive role in determining the total level of general revenue grants to the States.

In 2017, the Australian Government asked the Productivity Commission (PC) to conduct an inquiry into HFE. The final PC report was handed to the Government in May 2018 and the Government released an interim response to the report in July 2018. Legislation has now passed the Parliament to amend the Commonwealth Grants Commission Act 1973 and the Federal Financial Relations Act 2009 to give effect to the Government’s policy of:

  • introducing a minimum GST revenue sharing relativity (relativity floor)
  • permanently boosting the GST revenue pool with additional Commonwealth financial assistance
  • transitioning the HFE system from full equalisation (so-called equalising to the strongest State) to ‘reasonable’ equalisation, based upon the fiscal capacity of the stronger of New South Wales and Victoria.

The new policy includes a transition to the new arrangements. The transition period will end in 2026-27.

CGC terminology

This document provides a glossary of terms used in CGC documents.

Glossary (PDF 205 KB) Glossary (DOCX 531 KB)


Trends in fiscal equalisation

This paper provides information, since the 1993 Review, on how much of the FAGs or GST revenue was distributed to each State and the most important drivers of this distribution over time.

Trends in horizontal fiscal equalisation (PDF 829 KB) Trends in horizontal fiscal equalisation (DOCX 687 KB)


Commonwealth and State finances

These papers provide a brief history of Commonwealth-State financial relations since federation with a particular focus on equalisation transfers, and an overview of State budgets since 2000-01.

Commonwealth-State financial relations (PDF 500 KB) Commonwealth-State financial relations (DOCX 206 KB)
Changes in State budgets 2009-10 to 2018-19 (PDF 1.1MB) Changes in State budgets 2009-10 to 2018-19 (DOCX 621KB)


General Revenue to States - time series data

General Revenue Grants From 1910 (XLSX)
Relativities used for distribution of general revenue payments to states (XLSX)


History of selected assessments

Over its history, the Commission has adopted a range of methods to assess different areas of State service delivery and revenue raising capacity. These methods have evolved as either the nature of those activities have changed, or because of changes in what data were available to support an assessment. From time to time on this page the Commission will provide the history of how selected assessments have evolved, relating to areas of interest that have been raised in other fora.

History of Commission Methods (PDF 385 KB)

History of Commission Methods (DOCX 163 KB)

History of Contemporaneity (PDF 194 KB)

History of Contemporaneity (DOCX 113 KB)

History of the Administrative Scale Assessment (PDF 1.03 MB)

History of the Administrative Scale Assessment (DOCX 261 KB)

History of the Assessment of Economic Development (PDF 345 KB)

History of the Assessment of Economic Development (DOCX 152 KB)

History of the Capital Assessment (PDF 299 KB)

History of the Capital Assessment (DOCX 151 KB)

History of the Gambling Assessment (PDF 743 KB)

History of the Gambling Assessment (DOCX 251 KB)

History of the Mining Assessment (PDF 861 KB)

History of the Mining Assessment (DOCX 508 KB)

History of the Regional Costs Assessment (PDF 565 KB)

History of the Regional Costs Assessment (DOCX 376 KB)

History of the Wage Costs Assessment (PDF 417 KB)

History of the Wage Costs Assessment.docx (DOCX 165 KB)