Volatile Mining Revenues and State Government Budget Decisions

• Published date: 01 June 2023
• Author: John Freebairn,William Griffiths
• Date: 01 June 2023
• DOI: http://doi.org/10.1111/1467-8462.12510

The Australian Economic Review, vol. 56, no. 2, pp. 192–203 DOI: 10.1111/1467-8462.12510

Volatile Mining Revenues and State Government Budget

Decisions

John Freebairn and William Griffiths*

Abstract

Mining royalties provide a volatile source of

revenue for state governments in Australia.

We explore the effects of changes in royalty

revenue received by a state government on

current‐year budget decisions about expendi-

ture, tax revenue and the budget surplus. The

literature postulates different models for how

lower‐level government budget decisions re-

spond to a revenue windfall from a higher

level of government. Empirical evidence on

these models over 1998–2019 provides strong

evidence that over a half of a royalty windfall

becomes a change in budget expenditure.

Estimates of changes to tax revenues and the

surplus are not definitive nor robust.

KEYWORDS

mining royalties, state budgets

1. Introduction

Mining royalties provided $14.8 billion in

revenue for the state (and territory) govern-

ments in 2018–19. This amount represents an

average contribution of 18 per cent to own‐

state revenue and 6 per cent to total state

expenditure. Royalties primarily are an ad

valorem share of gross revenue on sales of

mining products. The mix of source minerals

and the relative revenue contribution of

royalty revenue to total state budget revenue

varies across the states. Wide fluctuations in

the annual royalty revenue have occurred over

recent decades, and with marked differences

between states. This article assesses how state

governments in their current‐year budget

decisions allocate fluctuating royalty revenues

between changes in own government expen-

ditures, own government other forms of

taxation and the budget surplus (or deficit).

The literature posits two quite different

models and outcomes for the allocation of an

exogenous revenue windfall, usually a grant

from a higher to a lower level of government,

or special mining‐industry revenue. A bene-

volent state government maximising society

welfare would treat an increase in royalty

revenue as a windfall increase of society

income and allocate most of the windfall to

lower state taxes. By contrast, the flypaper

effect model posits government treating the

change in royalty revenue primarily as a

change in budget income and then using it to

finance a similar change in state government

expenditure.

* Freebairn and Griffiths: Department of Economics,

University of Melbourne, Parkville, Victoria, Australia.

Corresponding author: Griffiths, email: <b.griffiths@uni-

melb.edu.au>.

© 2023 The Authors. The Australian Economic Review publishedby John Wiley & Sons Australia, Ltd on behalf of The University of

Melbourne, MelbourneInstitute: Applied Economic & Social Research, Faculty of Businessand Economics.

This is an open accessarticle under the terms of the Creative CommonsAttribution‐NonCommercial‐NoDerivsLicense, which permits

use and distribution in any medium, provided the original workis properly cited, the use is non‐commercial and no modifications or

adaptations are made.