A policy approach to minimising fiscal illusion in Australian local government

Fiscal illusion occurs when citizens fail to understand the financial predicament of their governments and also misperceive the true cost of government goods and services consumed. It is an important problem because it can - if left unchecked -result in financial sustainability problems. Moreover, fiscal illusion can also generate sub-optimal demand, elicit tax revolts and entrench intergenerational inequity. In this paper, the scholarly literature surrounding fiscal illusion is reviewed with a particular emphasis on addressing the gap in the literature that exists with respect to local government. Reference is then made to standard economic theory to suggest a number of practical measures that might be taken to mitigate the problem. The paper concludes with a consideration of the important lessons that can be learned by other tiers of government that might also be faced with the problem of fiscal illusion.