The term fiscal imbalance is used in Australia in relation to the flow of funds between its federal

Government of Australia

The Commonwealth of Australia is a federal constitutional monarchy under a parliamentary democracy. The Commonwealth of Australia was formed in 1901 as a result of an agreement among six self-governing British colonies, which became the six states...

, state and territorial

States and territories of Australia

The Commonwealth of Australia is a union of six states and various territories. The Australian mainland is made up of five states and three territories, with the sixth state of Tasmania being made up of islands. In addition there are six island territories, known as external territories, and a...

 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

Commonwealth Grants Commission

The Commonwealth Grants Commission is an Australian government body that advises on Australian Government financial assistance to the states and territories of Australia with the aim of achieving Horizontal Fiscal Equalisation....

. 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.

History

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

High Court of Australia

The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...

's striking down of many state taxes because they were classified as excises, which are reserved for the Commonwealth according to the Australia Constitution.

Specific Purpose Payments

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.