Why should anyone be surprised that State politicians act like politicians everywhere in seeking to advance (or at least appear to) the interests of their constituents. " we would have loved to do more for you voters but that mean Grants Commission forced us to subsidise those other States with your money even though they are raking in the dough and we are doing it tough'

I find the article and several of the comments here distasteful, because they are founded on a corrupt morality which presumes or argues that robbery is fine when it’s of the rich to pay the poor, but not when it’s the other way around. That, and the fact that all these decisions about re-distribution boil down to value judgements made in the name of socialism to appease the mob.

Apart from denying freedom, forced wealth re-distribution systems lead directly to a general overall lowering of living standards, as Australia’s fall in living standards relative to other countries over the last few decades bears witness. Now we’re seeing the same thing happening at a state level.

We need to start again, this time with a constitution that recognises that robbery is wrong, regardless of who is being robbed. As any student of basic economics should know, general prosperity can only be achieved through respecting private property rights.

I am grateful to the writer for introducing me to the concept of Horizontal Fiscal Equalisation - I had naively assumed that it was just another one of those horse-trading deals between the State and Federal Governments.

But it does seem terribly anachronistic.

The original idea was, according to Professor Peter Groenewegen in "Public Finance in Australia: Theory and Practice" that "equalisation grants should be large enough to allow the poorer states to provide the same standard of services as the more wealthy ones"

But that was before the entire process was overtaken by the principle of “user pays”.

We live in a substantially different world to the one that created these rules.

As Mr Eslake himself points out, different governments take different views on what is a "service", which surely renders the entire process a lottery.

One government may decide to build roads for its citizenry, while another takes the view that it is the responsibility of commercial enterprise. PPP may be a "political choice", as he puts it, but wouldn't it be more consistent to take this under consideration when passing the loot around, instead of simply saying that it is "not something that's been forced on them by the Grants Commission".

The entire process is a hangover from the days when it was considered the duty and responsibility of governments to provide services to their populace. I suggest we simply disband the committees that oversee all this, together with the legions of public servants who spend their lives in the minutiae of "reducing [NSW's] share of the 2006-07 GST pool by 1.1 per cent and 1.5 per cent respectively", as if this were something meaningful.

But maybe I have this all wrong, and it isn't simply a hangover from the time when WA threatened to secede from the Commonwealth if they didn't get some money. Maybe it isn't just another example of over-regulation and over-government that eats away at the country's foundations. And just maybe it isn't the mishmash of cargo-cultism and political patronage that it appears to be.

I have only one correction to Saul's later comment. That is, the new state movements in Northern NSW, The Riverina and North Qld didn't come to naught, they simply haven't completed the job, yet.

And we need to get these payments into perspective. Thye are a major part of the funding for NT but make up less than 4% of the Qld budget. And in total, amount to a much smaller portion of NSW or Victorian outlays.

The total so-called drain on these states' revenue is insignificant compared to the benefits gained to their circular flow of money from their share of other federal outlays.

'Perseus' makes a good point when he notes that the share of GST revenues 'redistributed' to the NT, Tasmania and SA represents a much larger share of their budgets than it does of the NSW and Victorian budgets.

I think 'Rhian' is arithmetically incorrect in suggesting that the Grants Commission effectively imposes a 100% marginal tax rate on the above-average incomes of the richest States; among other things this ignores the fact that (as I noted in my earlier post) the Grants Commission's assessments have regard to the relative demand for and cost of providing services in each State as well as to each State's revenue-raising capacity.

'Pericles' is correct in stating that the Grants Commission was set up in the aftermath of the Western Australian secession referendum in the early 1930s, although the Commonwealth Government had been making 'Special Grants' to Tasmania, South Australia and Western Australia since 1910, and the establishment of the Grants Commission was intended to put the payment of these grants on a more transparent and independently-determined basis. I would readily acknowledge that the 'transparency' objective has become lost in the mists of time, and today very few people outside of the Commission itself and State Treasuries really understand how the Commission arrives at its precise recommendations.

However, while I agree with 'Pericles' that the 'user-pays' principle has become much more widespread than when the Grants Commission was first established, I think that most Australians still expect State governments to provide (or, at least, to finance the provision of) 'core' public services such as education, health, law & order, and public transport; and that most Australians would not want to see disparities in access to these services between different parts of the country as wide as those evident in the US or Canada. The distribution of GST revenues - which are today the most important single revenue source for State and Territory Governments - is a major factor in ensuring that access to these services is reasonably equal across this country.

Saul,
I'm not sure that the fact that "averaging" is needs-adjusted and takes account of expenses as well as revenues renders the income tax analogy entirely invalid (though I’ll grant it’s not exactly equivalent). Allowing for these factors it's still the case that state governments do not get to keep any fiscal dividend that might be generated by sound economic policies, and are rewarded for bad policies that erode their tax bases with an increased share of the GST pot