Capital equalization and the Australian states

The Australian Grants Commission has recently considered ways to take accou nt of differences in capital costs across States within the existing fiscal equalization formula. Here we develop a theoretical methodology for estima ting differences in the costs of capital faced by the States in the General Government Sector. This methodology is used to generate preliminary estima tes of State capital cost 'disabilities' from 1962-63 to 1995-96. Finally, we suggest how the methodology and the estimates of capital cost disabiliti es might be integrated into the Commission's formula to produce a grant dis tribution which reflects different costs of capital across States.