Fiscal Decentralisation, Macroeconomic Conditions and Economic Growth in Australia

This paper analyses the impact of fiscal decentralisation on the Australian economy at both the aggregate and state levels. Attention is given not only to economic growth but also to a number of important macroeconomic variables which may influence growth. The results suggest that there is no straightforward impact of fiscal decentralisation on the Australian economy. At the aggregate level, when measured through expenditure shares, decentralisation is found to decrease medium-term economic growth, worsen the budget balance and increase the size of the public sector. No statistically significant effects of decentralisation are found on price stability, physical capital investment or short-term economic growth. Alternatively, revenue decentralisation is found to increase medium-term economic growth, improve the budget balance and have a stabilising effect on prices, but no relationship is found with the size of the public sector. At the state level, decentralisation is generally found to have no significant impact on the distribution of income but a weak negative effect on economic growth. In obtaining these results, special consideration is given to variable measurement, model specification, estimation technique and sample coverage. The findings highlight the importance of understanding more than just the effect of decentralisation on any one facet of an economy.