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An issue in the allocation of GST revenue in Australia

Comments on Henry Ergas "Europe's Greek tragedy has a lesson for Aussies", 30/04/2010, http://www.theaustralian.com.au/news/opinion/europes-greek-tragedy-has-a-lesson-for-aussies/story-e6frg6zo-1225860365007

While the article relates to wider issues, the allocation of the GST revenue to the States by the formula decided by the Commonwealth Grants Commission (CGC) is one of those.

The article argues an equal per capita allocation is better than the CGC's. Although it has some merits, it over simplified the issue.

The CGC formula does not consider incentives or disincentives and that is both good and bad. There are reasons that the CGC should recommend a non equal per capita allocation of the GST. However, there are also reasons that it should also take incentives into its consideration of the allocation formula, that is to encourage efficiency in cost reduction and provide incentives for revenue retention.

In essence, both Henry Ergas and the CGC are on the extremes. An optimal formula should be somewhere in between.

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