The term fiscal imbalance is used in Australia in relation to the flow of funds between its federal, state and territorial governments. Currently in Australia, the Commonwealth government raises greater tax revenue than the state and territory governments. This vertical fiscal imbalance is remedied by Commonwealth grants to states and territories of Australia.
Australia also suffers from horizontal fiscal imbalance, which is remedied by a horizontal fiscal equalisation (HFE) policy overseen by the Commonwealth Grants Commission. When the Commonwealth transfers funds to states, it does not give each state a fixed amount or an amount proportional to the state's population relative to other states. Rather, it uses a formula to disburse funds according to which states need it most based on need and ability to raise own-revenue.
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Vertical fiscal imbalance in Australia is largely the product of the Commonwealth's takeover of income taxes in World War II and the High Court of Australia's striking down of many state taxes because they were classified as excises, which are reserved for the Commonwealth according to the Australia Constitution.[1]
Commonwealth grants to the states can be divided into two types: (1) general purpose payments, which states can use for whatever purpose they choose and (2) specific purpose payments (SPPs) (or tied grants), which are grants to states for specific projects decided by the Commonwealth, e.g. schools, hospitals, or roads.[2]