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

Abstract

This paper seeks to add to the literature on State and local government fiscal policy_x000D_ adjustment and shock adjustment modeling in an inter-temporal context, with a focus on_x000D_ Australian Fiscal Federation Arrangements. Vector Error Correction Models are estimated_x000D_ using aggregated state and local “Government Finance Statistics” data from 1961-2005 to_x000D_ examine, compare and contrast dynamic budgetary adjustments and fiscal policy in the Australian federation of states. Findings include clear similarities in fiscal policy regarding_x000D_ expenditure when: (i) tax revenues; (ii) net debt receipts; and (iii) grant revenues are_x000D_ 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_x000D_ unemployment rate changes over the period examined. Our results illustrate that the states’_x000D_ limited fiscal elbow room has not stopped them developing contrasting fiscal policies or_x000D_ stopped specific state issues affecting fiscal adjustments at a local level.