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Keywords:

  • Fiscal equalisation;
  • Strategic behaviour;
  • Local public goods;
  • Labour mobility;
  • Efficiency;
  • Equity;
  • Pareto

We argue that Australian equalisation should be driven by efficiency concerns. To this end, we propose an efficiency-based equalisation model and argue that, if implemented, this model would yield welfare gains in all States, relative to the status quo. Our model is also shown to yield superior welfare outcomes to an equal per capita allocation model (as proposed by some researchers to replace the existing model). The conclusion notes that given the magnitude of the resources involved, and the on-going concerns over equalisation, efficiency and equity, there is a case for a comprehensive and impartial review of the Australian grant system, including the equalisation methodology.