What is Horizontal Fiscal Equalisation (HFE)?
The objective of HFE is to ensure that all States and Territories (the States) have a similar fiscal capacity to deliver government services to their residents, and that the tax burden is similar on all taxpayers. This is particularly important for the States with smaller populations and economies that face higher service costs and/or weaker tax bases than the States with larger populations and economies.
It reflects the belief that all Australians should have access to a similar standard of government service, regardless of the jurisdiction in which they live.
This is a strong egalitarian principle, which is supported by the Australian community and has been reflected in the Commonwealth Grants Commission's approach, in one form or another, since its inception in the 1930s.
If States were not provided with the same capacity to provide services through HFE, inequality within the Australian community would increase over time, because disadvantaged States would not be provided with the capacity to compensate for their disadvantages and strong States would have a greater capacity than required to meet their needs. This would give the latter the capacity to provide an above national average standard of services and/or lower taxes.
What does HFE mean for Tasmania?
In 2018-19, Tasmania's total general government revenue is expected to be approximately $6 217 million. The State's largest source of revenue is GST revenue, estimated to be $2 488 million in 2018-19, or approximately 40 per cent of Tasmania's total revenue.
Tasmania will receive $1.1 billion more in GST revenue than its population share of $1.4 billion in 2018-19 because of HFE.
This is 17 per cent of total revenue and almost the same as the amount received from the Australian Government payments for specific purposes.
The relative importance of each source of revenue for Tasmania is shown in the following chart.
The nature of the GST revenue pool determination is a 'zero sum game' in that for a State to receive above population share, another has to receive below its population share.
For instance, if GST was to be distributed on an equal per capita (EPC) basis, Tasmania would lose $2 018 per capita or $1.1 billion in 2018‑19 alone.
Clearly, this would result in less equalisation and a greater level of inequality between jurisdictions.
For a more detailed explanation of these concepts, please see Treasury’s paper published in June 2017, Horizontal Fiscal Equalisation: an equitable approach to GST distribution.