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The fiscal imbalance in Australia is the disparity between the revenue generation ability of the three levels of governments in Australia relative to their spending obligations; but in Australia the term is commonly used to refer more specifically to the vertical fiscal imbalance, the discrepancy between the federal government's extensive capacity to raise revenue and the responsibility of the ...
The vertical fiscal imbalance, alongside section 96 of the Australian Constitution has effectively extended the Commonwealth's powers beyond those enumerated in section 51 of the Australian Constitution and other explicit enumerations of Commonwealth legislative power (e.g. section 52 and section 90).
The constitutional scheme as well as judicial interpretations have created a vertical fiscal imbalance, whereby the Commonwealth has the revenue-raising abilities while the States have major spending responsibilities. For example, primarily, Australian states fund schools and hospitals.
The discussion of fiscal imbalance and equalisation was of particular importance in the drafting of the new Iraqi constitution. It was a sticking point for the drafting process—with the oil rich regions seeking to minimise the reallocation of revenue while other regions sought to maximise equalisation payments.
It was a major contributor to Australia's vertical fiscal imbalance in the spending requirements and taxing abilities of the various levels of government, and was thus a watershed moment in the development of federalism in Australia.
Many public policy experts prefer the notion of "vertical fiscal asymmetry" —coined and conceptualised by Sharma (2011) [5] —over its alternative "vertical fiscal imbalance" because the former is relatively neutral [6] [7] and highlights the unfeasibility of a balance or symmetry purporting to eliminate any kind of vertical fiscal asymmetry ...
The validity of this scheme was upheld twice in the High Court. "Uniform" income taxation levied by the Commonwealth became the principal instrument of Commonwealth financial domination and vertical imbalance in the Australian federal system (vertical fiscal imbalance). [9]
Tied grants have often been 'forced' upon states due to the vertical fiscal imbalance between states and the Commonwealth. By contrast, the areas where s51(xxxvii) have been used generally reflect a consensus that differing state systems are undesirable.