Abstract:Since 1981, the financing of the‘ ACT has been subject to five inquiries by the Commonwealth Grants Commission. These inquiries have incorporated the ACT into the fiscal equalisation process between Australian states and territories. and have significantly affected the ACT'S general revenue grants from the commonwealth. The inquiries produced evidence of generous commonwealth funding of the ACT compared with the other states. This funding has given rise to “over‐spending” on service provision by the ACT government. The ACT government is not currently responsible for all identified “over‐spending”. being buffered to some extent by transitional allowances recommended by the Grants Commission. The ACT government is, however, experiencing fiscal stress for the “overspending” for which it is responsible. This stress is expected to increase in the future as the ACT government comes to bear the full burden of all “overspending”. A significant cause of the “over‐spending” identified by the Grants Commission was health services expenditure. This situation has raised a number of interesting questions. Is the “overspending” on health a conscious policy decision to produce a higher quantity/quality combination of health services in the ACT? Or does it represent inefficiency? What policy options are appropriate in view of the “over‐spending” on health? This paper addresses these questions using data from the Grants Commission inquiries and a recently released study of hospital utilisation and costs in Australia. It is concluded that, at least with respect to public hospitals in the ACT. excessive stafting is the primary cause of “over‐spending”. There is little evidence to support an argument that this “over‐spending” is resul