Fiscal Federalism in Australia: Equity~fficiency Versus Public Choice Approaches in Explaining Intergovernmental Grants

Intergovernmental grants have been conventionally explained on the basis of either equity/efficiency and/or institutional considerations. As a result empirical approaches to grants have usually examined the impact of these transfers on recipient government expenditures, rather than evaluated the impact on the donor government and/or its political agents. The alternative public choice approach analyses intergovernmental ~ants within a model of political expediency; that is, grants are used by federal government politicians to purchase political capital, thereby enhancing their own probabilities of reelection. In this paper the public choice model is tested for six Australian states for the period 1981-82 to 1991-92 using unsystematic ~ant transfers. The results provide some support for the " public choice approach to ~ant determination The theory of intergovernmental grants now has a well-established literature (Oates, 1972; Gramlich, 1977) and the empirical application of this body of thought proceeds apace (Oates, 1979; Winer, 1983; Logan and O’Brien, 1989). Whilst interest has largely focussed on the impact of grants on recipient government expenditures and the theoretical justification for grants on social welfare grounds, until recently the literature has tended to ignore "...the realities of the political marketplace in which governments must operate" (Grossman, 1987: 1). Accordingly, the present ̄ paper attempts to apply a public choice model to the empirical analysis of intergovernmental grant determination in the Australian federal system over the period 1981-82 to 1991-92. The paper itself is divided into five main areas. Section I provides a brief review of the literature of the traditional equity/efficiency approach to grant determination and the more modern public choice explanations’~offered by Breton and Scott (1980), Grossman (1987; 1994) and Leyden (1992). Section II outlines the institutional peculiarities of the Australian federal grants system and the difficulties posed by the principle of fiscal equalisation for the empirical testing of public choice theories. Models and hypotheses for the analysis of intergovernmental grants in Australia for the period 1981-82 to 1991-92 are discussed in Section lIl, whilst the results are scrutinised in Section IV. The paper ends with some brief concluding remarks in Section V. I. Political Factors in the Grants Process Intergovernmental grants are usually justified on the basis of what may be referred to as traditional "equity/efficiency" type criteria (Bungey, Grossman and Kenyon, 1991; Grossman, 1994). These criteria generally regard intergovernmental grants as the necessary transfer of funds in a federation,