Abbott’s federation reform push is sound

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ScreenHunter_4648 Oct. 27 08.07

By Leith van Onselen

Prime Minister Tony Abbott delivered a sensible speech over the weekend, whereby he called to fix the “dog’s breakfast” of federation by working to resolve the mis-match between the states responsibilities and their revenue bases:

We certainly have a national government and yet we have an unsatisfactory system of governance, because all too often wherever you look – whether it be the roads, the schools, the hospitals – it’s hard to know who is in charge.

That is what bedevils modern Australia in so many areas of our national life – who is really in charge…

Rethinking the conventions about which level of government is responsible for the delivery of particular services or the revenue measures to which particular levels of government should have access will require a readiness to compromise and a mutual acceptance of goodwill that’s rarely achieved in our highly partisan system…

…[Reform could deliver] the self-evident benefits of less waste, less overlap, less duplication; it’s to end the blame game by trying to ensure that voters know who’s really responsible for the things they don’t like; and it’s to harvest the multi-billion dollar benefits in better services and lower costs that would come from successful reform.Lack of “big bang” reform would not be a disaster but it would be a disappointment and it would be a failure of this generation of politicians…

We would be failing in our duty not to consider better management of the “dog’s breakfast of divided responsibilities” that characterises this Australian federation today…

A hundred years ago the states were clearly responsible for funding and operating public schools, public hospitals, public transport, roads, police, housing and planning.

Under our constitution, the states are still legally responsible for them but a century of encroachment has left the Commonwealth financially responsible for vast services that it doesn’t actually deliver and can’t really control.

…that’s why resolving the mismatch between what the states are supposed to deliver and what they can actually afford to pay for is worth another go…

Collectively, the Australian states currently spend about $230 billion a year but raise only about $130 billion from their own taxes; of the rest, about $54 billion comes from the GST, a tax that the Commonwealth collects but the states spend; and a further $46 billion comes directly from the Commonwealth under specific purpose payments or national partnership agreements…

To address “vertical fiscal imbalance” we could either adjust the states spending responsibilities down to match their revenues, or we could adjust their revenues up.The first approach involves the current spending responsibilities being redistributed so that the Commonwealth would take on more and the states would deal with less…

Alternatively, the Commonwealth could stop funding programmes in areas of state responsibility and stop using its financial power to influence how the states deliver services.

In that case, the Commonwealth would be ready to work with states on a range of tax reforms that could permanently improve the states’ tax base – including changes to the indirect tax base with compensating reductions in income tax…

So this federation reform process is proceeding in parallel with a tax reform process which makes this a once-in-a-generation opportunity for all first ministers, all levels of government to address the issues bedevilling our federation.

Together, the Commonwealth and the states should be prepared to look at all our existing taxes to make them lower, simpler and fairer…

Abbott’s reasoning is sound. The shared responsibility between the commonwealth and states across many areas of public policy is creating sub-optimal outcomes for taxpayers and the nation at large.

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As the saying goes, “when everyone is responsible, no one is responsible”, and the shared responsibility across education and health (amongst other areas) creates incentives for buck passing, cost shifting, and lack of accountability, not to mention the inefficient use of resources via excessive duplication between the various levels of government (e.g. state and federal health departments and agencies).

As correctly argued by Abbott, ending such duplication could deliver billions of dollars of benefits to taxpayers and the economy, by slashing costs as well as delivering more efficient and accountable outcomes.

The key to reform, however, is ending vertical fiscal imbalances whereby the states’ responsibilities are well in excess of their revenue bases. This requires either: 1) the federal government taking over full responsibility in certain policy areas (e.g. public hospitals); or 2) the states gaining new revenue sources from the federal government in return for taking greater responsibility.

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Abbott also announced a federation reform White Paper, which will outline options for reform. A Green Paper is to be prepared in the second half of next year with the White Paper released in the run up to the next federal election.

The steering group for the White Paper is to include the heads of all first ministers’ departments and the Australian Local Government Association CEO. There is also to be a bipartisan advisory group comprising: former South Australian Labor premier John Bannon, former Victorian Liberal treasurer Alan Stockdale, Vice Chancellor of the Australian Catholic University, Greg Craven, Business Council CEO, Jennifer Westacott, former Western Australia Attorney-General Cheryl Edwards and Queensland Public Service Commission Chairman, Doug McTaggart.

As reported in The Australian today, a group of former Labor and Liberal leaders and public service heads have already produced a road map for reform, including broad-based land taxes, road tolls and possibly an increase in the GST to fund the states, with the group warning that “state governments are being ‘held to ransom’ by a system that starves them of cash for the services that taxpayers expect”.

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The group, which includes former New South Wales Liberal premier Nick Greiner, former Victorian Labor premier John Brumby, former federal public service chief Terry Moran and former federal Liberal minister Fred Chaney, is to receive support from the Committee for the Economic Development of Australia (CEDA), who will today “step up the debate… by releasing reform options to give the states a share of income-tax revenue, a higher GST or greater land taxes to fund their needs” and will “propose a ­series of federal conventions over the year ahead to build a consensus for change, matching the government timetable to produce a final reform paper at the end of next year”.

The CEDA reform proposals are to include giving the states a guaranteed share of federal income tax as well as proceeds of a bigger GST to help fund schools and hospitals.

While the devil will ultimately be in the detail, the Coalition should be commended for taking on reform of the federation, which if executed correctly offers big pay-offs for the nation.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.