Targeting Regional Output with State Government Fiscal Instruments : A Dynamic Multi-Regional CGE Analysis

Between 1986/87 and 1998/99, Tasmania's share of national output declined from approximately 2.3% to 1.9%. At least two forecasters have projected that Tasmania's share of national activity will continue to decline over the period 1999/00 to 2003/04, falling to 1.7% of national activity by the end of this period. This paper investigates whether it is within the power of the Tasmanian government to influence materially this forecast outcome by means of a budget neutral tax policy. Two such policy packages are investigated using a dynamic two-region CGE model of the Australian economy (FEDERAL-F). In the first, the question asked is whether there exists a feasible re-arrangement of the Tasmanian government's revenue raising effort which has the effect of maintaining, over the forecast period, Tasmania's share of national GDP at its 1998/99 level. This is found not to be so. Hence, a second and (comparatively) less ambitious policy is then considered. This involves the gradual but complete elimination of payroll tax over the forecast period, and its replacement with a direct tax on households. Even when such a dramatic tax change as this is considered, the impact on the forecast for Tasmania's share of national activity is not large