Federal Expenditure and Fiscal Illusion: A Test of the Flypaper Hypothesis in Australia

Despite the fact that there are strong a priori grounds forpresuming that the intergovernmental grants characteristic offiscal federalism in Australia may generate fiscal illusion,no empirical effort has been directed at this line of inquiry.The present article seeks to go some way toward remedying thisdeficiency by evaluating the flypaper variant of the fiscalillusion hypothesis using a time-series analysis of AustralianCommonwealth expenditures for 1981 to 1992. The results of theseestimations provide some tentative empirical support for theexistence of a flypaper effect on public expenditure in Australiafor the period under review.