Dynamic Budgetary Adjustments in the Australian State Government Finance Sector: An Econometric Approach

This paper seeks to add to the literature on State and local government fiscal policy adjustment and shock adjustment modeling in an inter-temporal context, with a focus on Australian Fiscal Federation Arrangements. Vector Error Correction Models are estimated using aggregated state and local "Government Finance Statistics" data from 1961-2005 to examine, compare and contrast dynamic budgetary adjustments and fiscal policy in the Australian federation of states. Findings include clear similarities in fiscal policy regarding expenditure when: (i) tax revenues; (ii) net debt receipts; and (iii) grant revenues are increasing, across states. Further, clear differences among the states are found in (i) debt servicing and taxation changes as grant revenue increases; (ii) tax regimes in response to increasing net debt receipts; and (iii) debt servicing and taxation policy in times of increasing expenditure. Overall, the states have mostly been marginally unaffected by interest or unemployment rate changes over the period examined. Our results illustrate that the states' limited fiscal elbow room has not stopped them developing contrasting fiscal policies or stopped specific state issues affecting fiscal adjustments at a local level.