FEDERAL EXPENDITURE AND FISCAL ILLUSION - A TEST OF THE FLYPAPER HYPOTHESIS IN AUSTRALIA

Despite the fact that there are strong a priori grounds for presuming that the intergovernmental grants characteristic of fiscal federalism in Australia may generate fiscal illusion, no empirical effort has bee n directed at this line of inquiry. The present article seeks to go so me way toward remedying this deficiency by evaluating the flypaper var iant of the fiscal illusion hypothesis using a time-series analysis of Australian Commonwealth expenditures for 1981 to 1992. The results of these estimations provide some tentative empirical support for the ex istence of a flypaper effect on public expenditure in Australia for th e period under review.