Put an end to location-based subsidies – Paul Kerin

In a recent article in The Australian, Paul Kerin argues that location-based subsidies are pervasive and substantial, but make us worse-off. Using examples from the health, insurance telecommunications and utilities sectors, he explains why. The full article is available here



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2 Responses

  1. Robert Schwarz says:

    Horizontal fiscal equalization (HFE) is not a system of locational subsidy

    In a recent article in the Australian P Kerin expresses opposition to locational subsidies.

    There are certainly questions around the appropriate nature and extent of locational subsidies, but HFE (the method used to determine the distribution of GST grants to the States) is not a system of locational subsidies.

    A locational subsidy is a payment which mitigates the cost of services provided to residents of particular (often non metropolitan) locations. It commonly involves higher government expenditures per individual or household in the relevant location to enable a more equal service standard as compared with other locations. The case for locational subsidies as with all government interventions which affect the distribution of income and services as between individuals and households, depends on a political/social welfare value judgement.

    Taxes and subsidies are based on many criteria, not just location, for instance income levels, and lifecyle status (children and retirees as a group make a net draw on government budgets, working-age persons as a group are net contributors). There is a geographic dimension to many of the fiscal transfers conditioned on these other criteria, but this does not mean that they can sensibly be construed as locational subsidies.

    To illustrate, consider an old age pensioner around the corner from a chief executive. The old age pensioner is a net recipient from government budgets and the chief executive is a net contributor to them. There is also a geographic dimension associated with this: the address at which the old age pensioner lives is a recipient of net transfers and the address at which the executive lives is a net contributor to budgets, so that we can identify a redistribution of resources across locations. But it is simply not sensible to consider this as a locational subsidy.

    This is the trap that P Kerin falls into when he suggests that HFE involves a locational subsidy to residents of South Australia.

    The Australian community having decided which types of services (eg police, schools and hospitals) and expenditure levels should occur, HFE enables the same government expenditure per comparable person in comparable locations across states. Were it not for HFE, expenditure per comparable person in SA would be less than in another state purely on account of factors such as the demographic structure of the population resident in SA affecting both the tax base and spending levels; and lesser operable mineral deposits than in WA.

    No costs overall would have been saved if P Kerin had decided to remain in Victoria rather than migrate to SA.

    – Robert Schwarz

  2. Jonathan Pincus says:

    Horizontal Fiscal Equalization is a locational-specific subsidy

    Robert Schwarz wrote that Paul Kerin fell into a trap when Paul wrote that the system of horizontal fiscal equalization is a locational subsidy. But I will argue that Robert is the one who has made an error.

    Robert takes the example of an old age pensioner and the CEO, with the pensioner being a net recipient of public funds and the CEO a net contributor. They live in different locations. Ah, says Robert, Paul would mistakenly conclude that the pensioner is being subsidized because of his location, not because of his relative poverty.

    The social security and tax systems are for individuals, in that payments to and from the public purse are based on the situation or characteristic of the person or household making or receiving the payment.

    In contrast, the HFE system is social welfare for State and Territory governments. HFE does not redistribute income to individuals according to their individual characteristics, like age or income levels or health status. It redistributes GST monies according to a set of criteria devised by the Commonwealth Grants Commission, which are applied to the finances of a State or Territory. Those criteria include the cost of providing government services to dispersed populations.

    Cutely, Robert asserts that ‘No costs overall would have been saved if P Kerin had decided to remain in Victoria rather than migrate to SA.’ But, from a national point of view, extra costs of a material quantum would have been incurred if tens of thousands of P Kerins migrated from Melbourne—where it is relatively cheap to provide extra State government services—and settled in various rural and remote locations in South Australia, where it is relatively expensive to provide extra government services. And, in consequence, the HFE payments to the location called Victoria would fall, and those to the location called South Australia would rise; and, contrary to Robert’s assertion, costs overall would rise.

    Seems like location subsidy to me; and to pick up Paul’s main point, the individuals involved can ‘go bush’ but they do not ‘pay the price’. Nor does the government of SA pay the price, if it were all due to a successful SA campaign to attract the people.

    JJ Pincus

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