Fiscal Equalization in Australian Federalism: Managing Diversity of Size Among Subnational Jurisdictions

The Federal Commonwealth of Australia was established in 1901 by six self-governing British colonies of very different sizes. With lucrative customs and excise duties transferred to the Commonwealth, a politics of fiscal equalization quickly emerged among the six Australian States. The less populous States feared economic and fiscal domination. Managed politically for three decades, these fears became the focus of an independent, expert, economic body from the 1930s: the Commonwealth Grants Commission. Principles and methods developed by this body focused on comparative fiscal needs and capacities. In the 1980s, two more subnational jurisdictions joined Australia’s fiscal equalization system, two territories of the Commonwealth granted self-government. This increased the diversity of size among constituent units and led to methodological developments in assessing comparative fiscal capacities, or “relativities.” Two case studies from this recent era show contrasting developments in Australian fiscal equalization. The Northern Territory has maintained a high relativity for over three decades based on its dispersed Indigenous population, reflecting low-revenue capacity and high expenditure needs. Western Australia has developed high revenue capacity, based on royalties from iron ore mining. This has led Western Australia to argue against full fiscal equalization, winning significant concessions in this direction since 2018. Australian fiscal equalization is well institutionalized, but not beyond political challenge and change.