Opinion & Commentary
Continental drift: inching away from federalism
Health reform dominated the agenda, but the ghost at last week’s Council of Australian Governments (COAG) meeting was the future of Australia’s federal system of government. Whether you like the COAG outcome or not, it will give the system a further nudge in the direction it has been travelling since the ink dried on the constitution – towards increased Commonwealth financial power and policy influence at the expense of the states.
The same could be said of many other Commonwealth-state negotiations over the decades. The Australian version of federalism has evolved since 1901 not through any big-bang reform but through the negotiation of specific issues in Commonwealth-state relations. With a few exceptions, politicians have preferred to work on a small canvas, addressing bits of the system and changing it incrementally, while leaving the big picture to theoreticians.
A lighthouse museum in southwest Western Australia may seem an odd place to start, but that is where I was recently reminded of how soon after federation the process of incremental change started. There the story is told of the Commonwealth’s initiative in 1904 to take over lighthouses from the states and the resistance by the WA Premier of the day (perhaps no surprise there). The Commonwealth, of course, won that fight, just as it has won most disputes in its dealings with the states in the subsequent century or so. Lighthouses were followed by weightier matters such as the centralization of income tax and the funding and policy control of universities. Public hospitals are merely the latest episode in a long running serial. Despite the last minute tweaking of the health reform plan to win over reluctant premiers, it will result in increased Commonwealth involvement in public hospitals (with full responsibility for aged and primary care into the bargain).
On their own, none of these events has delivered a knock-out blow to the states, but the cumulative result of incremental change has been a huge shift of political power and policy control from the states to the Commonwealth. The question is not whether this shift has happened, but whether it is something to be welcomed or resisted.
No doubt the health changes are popular with the public, but what about the broader issue of expanding Commonwealth power and policy control, of which the health changes are a part? Whenever the public has been explicitly asked through a referendum to approve an extension of Commonwealth power, they have almost always refused. The federal government’s domain of control and influence has expanded not through constitutional change but through the imaginative exploitation of constitutional powers it already has, and to a lesser extent through accommodative High Court interpretation of those powers. Of particular note are the Commonwealth’s wide use of its power to make grants to any state “on such terms and conditions as the Parliament thinks fit” and its external affairs and corporations powers.
Universities are a good example of how the Commonwealth can start with no involvement and end up with full control. Until the early 1960s no Commonwealth money went to universities. Tied grants to the states for universities were started by the Menzies government and gradually expanded until the Whitlam government took over full funding of universities in 1973 - all of this despite the fact that the Commonwealth has no constitutional power over education and that the matter never went to a referendum. We may be witnessing the same process in relation to public hospitals, with the latest reforms a step along the way to full Commonwealth funding.
The public’s apparent acceptance of the expansion of Commonwealth powers in this fashion, when contrasted with the failure of the referendum route in the past, muddies the true state of public opinion towards the drift to greater centralization. Public opinion is quite capable of inconsistency - as when it expresses support for higher government spending and lower taxes at the same time – and it is up to leadership and the democratic process to resolve the inconsistencies. Often this means politicians framing an issue to get the result they want. If the question is put as “more money for public hospitals and shorter waiting times” there is no doubt what the answer would be, but if it is put as “more power to Canberra” the answer might well be different.
Despite this ambivalence, it is fair to say that federalism as an abstract ideal has never captured the public’s imagination in Australia as it has in some other countries. This is not because federalism lacks sturdy intellectual and theoretical foundations. There is a vast literature extolling its benefits based on constitutional theory, public choice and government accountability. Federal structures are seen as one of the checks and balances against excessive government power; they make government more accountable and responsive to the wishes of the people; they provide the opportunity for intergovernmental competition; and they are more conducive to policy experimentation than are centralized ‘one size fits all’ solutions.
Advocates of these benefits hasten to add that they can only be achieved if the federal system is properly structured to reflect the principles of federalism, with clear and rational divisions of powers and financial autonomy for each level of government. That describes a textbook model of federalism, not the hybrid version that has evolved in Australia, with its duplication and overlap, blame shifting and blurred accountability
The theoretical case for federalism has its advocates in Australian academia and think tanks, but lacks champions among the ranks of politicians. A sprinkling of federal politicians (usually from the right) has paid lip service to the principles of federalism but in practice has followed much the same centralist leanings as any others. State politicians’ resistance to Commonwealth incursions onto their turf has had more to do with game-playing for more federal money than defence of high principle.
Meanwhile, the case against Australian federalism is enjoying a resurgence. Political pragmatists shrug off the principles of federalism as too theoretical and irrelevant to what works best in practice. It is striking how anti-state sentiment now cuts across the political divide and across labour and business. John Howard, in his latter years as Prime Minister, was rejecting ‘neat theories’ of federalism and just last week joined former Labor prime minister Bob Hawke in voicing a wish that the states had never been created. They echoed Tony Abbott who, before becoming Opposition Leader, advocated abolition of the states. Meanwhile, the current prime minister wants ‘cooperative federalism’, which the skeptics see as nothing but a cartel of governments or centralism by another name. Big business for its part talks of a ‘seamless national economy’, even if that means putting uniformity ahead of the principles of federalism.
Those making the case for greater centralization and uniformity point to the increased integration of national life since 1901 and the need, therefore, to approach most policy issues from a national perspective. Moreover, the welfare state barely existed a century ago but now, for better or worse, is a pervasive feature of public policy, including health policy. As standards of welfare and equity should be national, the central government needs to be more involved in most of what the public sector does. Economic activity is more nationally organized and warrants a national approach to economic policy and reform.
At a more populist level, there is derision for a structure of government based on arbitrary lines drawn on the map of Australia more than a century ago; the public is cranky about perceived state incompetence in running services ranging from public hospitals to urban transport and policing; the federal system is seen as being too costly in administrative overhead, with too many houses of parliament and too many politicians; examples of duplication abound, as do pointless interstate differences in regulation and taxation; and there is acceptance of the Commonwealth’s dominance of the tax system.
These propositions may resonate with the public, but it is easy to pick holes in them. How well any government operates public services depends on organizational forms and structures, the quality of management, workforce skills, work practices and the absence of undue political interference – as well as the quantum of resources available. Superiority in resource management is not intrinsic to any particular level of government. The federal government usually has more money to throw at a problem, but it is not necessarily better than the states in managing resources. It runs programs such as Medicare and age pensions, but these are of a different kind from programs that deliver services, as distinct from cash, to people; with a few exceptions, the Commonwealth is fundamentally a vast money recycling operation, drawing it in through an army of tax collectors and disgorging it in the form of cash handouts to individuals and state governments.
Frequent calls for the Commonwealth to intervene in this or that area of state (or even local) responsibility seem to be motivated by frustration with the standard of services and the knowledge that the Commonwealth is usually more flush with funds, without much thought given to administrative competence. Confidence in Commonwealth administration has been dented by the ceiling insulation fiasco and other instances of bungling. Recognising the competence issue, there are those who say that funding and administration of service delivery can be separated. This proposition is at the core of the hospital reforms. If the Commonwealth has got the money but can’t deliver the services, why not blend Commonwealth money with local service delivery? The problem is that funding – particularly majority funding as with the hospital reforms – cannot be separated from policy and operational control. He who pays the piper tends to call the tune, even if that is not the initial intention.
A key plank in Rudd’s justification for his hospitals plan is the inadequacy of state funding to meet growing demands on the health system. But the adequacy of state funding is a perennial in Commonwealth-state relations. The states’ demands for a ‘growth tax’, which date back to their loss of income tax to the Commonwealth in the Second World War, were supposedly answered by the Howard government’s grant of 100% of GST revenue for the states to use as they wished. There was always less to this concession than met the eye; it delivered the states a greater quantity and quality of tax revenue, but not broader tax power. Nonetheless, there has always been a sense at the federal level that the GST deal was too generous to the states. Perhaps the only surprise should be that it has taken ten years for the Commonwealth to find a reason to cut the allocation to 70%. In doing so, the Commonwealth’s health reforms take an axe to state revenue and shift an equivalent amount of outlays from state to federal budgets. It is also no surprise that the states resisted, knowing that a precedent was being set.
It has barely registered in the public debate, but shifting the expenditure burden was not the only way to relieve the pressure of future health cost growth on the states; an alternative would have been to leave majority funding responsibility with the states and strengthen their tax powers at the expense of the Commonwealth. This alternative, involving greater decentralization of tax power, is not one that any Commonwealth government of any colour since federation has been willing to accept. It remains to be seen what changes to state taxation the Henry tax review has in mind, but the rumoured substitution of a federal resources rent tax for existing state mining royalties would be a further step towards greater centralization of tax power.
The states now rely on the Commonwealth for almost half their revenue. There are those who say that the states have only themselves to blame for this dependency because of their poor track record in managing potentially broad tax bases such as payroll tax. They cannot be trusted with the most efficient taxes, so this argument goes. It is not clear, however, which came first – the mismanagement or the dependency. Either way, the fact remains that for constitutional and historical reasons the Australian states - unlike their counterparts in some other federations - have no controlling access to the broad income and consumption tax bases, and have been left with the most despised taxes.
Public opinion may have found a way to reconcile its frustration with the states and its wariness towards explicitly increasing Canberra’s powers. There are signs of a more favourable view of local government and something we don’t have - regional government. A recent opinion survey as part of Griffith University’s federalism project revealed that 42% of respondents favoured creating regional governments. But talk of regional government is not new; it has been heard from time to time at least since the early 1970s. Constructed properly - with constitutional standing - regional government would require a major rewrite of the constitution, which hardly seems likely. Without that, the regional tier would have to be slotted in below the states in addition to or in place of local government. Like local government now, regional government without constitutional backing would be subordinate to a higher tier and lack the autonomy that full-blooded decentralization demands.
At least for the foreseeable future, it seems that radically different constitutional structures are a pipe dream. Abolition of the states is not on the cards. We will be working with the current structure and the question is how to make it work better. There is nothing pre-ordained or inevitable about Australia’s slow march towards a unitary system of government. It is not intrinsically the modern way to go or the natural order of things. Taking a world view, for every country that has moved towards greater centralization there is another that has gone the other way. It is a matter of choice. Australia’s centralist drift has been the cumulative result of the choices made in many relatively small matters along the road rather than an informed strategic choice. Perhaps a strategic choice would take us in the same direction anyway, but the national conversation necessary to inform that choice continues to be avoided.
The default setting for Australia’s federal system will produce a continued drift towards a unitary system through incrementalism. The constitution will stop it from ever quite reaching that end point, but we may wake up one day and realise that the states have been so marginalized that they have been as good as abolished, whether or not that is what we really want. While it is hard to find anyone who is happy with the status quo, there is strong opposition to a unitary system and strong support for decentralization - the question is what degree and kind of decentralization, and on that there is no consensus.
One alternative to the default setting is to halt and reverse the centralist trend by defining a substantive set of state responsibilities to be discharged without unwelcome Commonwealth interference, and to ensure there is a commensurate state revenue base.
This would still involve a large role for central government, but not as large as it has now. But the erosion of state powers has already gone so far that reversing the process would not be easy. Even some of the strongest believers in the theoretical case for federalism struggle to find a practical, politically saleable path back to their ideal federal model. The other alternative is to work more purposefully to narrow and clarify the states’ roles and responsibilities, while removing the overlap and duplication that mars the current hybrid system.
Robert Carling is a senior fellow at the Centre for Independent Studies
