Opinion & Commentary
Beware Canberra's power bid
Today's Council of Australian Governments meeting is the latest step in the Rudd Government's drive to reshape commonwealth-state relations in the mould of co-operative federalism. This has been well received against a background of widespread frustration with the way Australian federalism has evolved. But what does co-operative federalism mean, beyond cliches such as ending blame-shifting and buck-passing?
Whatever it does mean, the Rudd Government's actions should be judged according to what it does in six key areas.
First, Australian federalism has broken free of its anchor and, for decades, drifted far in the direction of centralism. A redefinition of the roles and responsibilities of the different levels of government is essential. Many other aspects of reform flow from it.
Second, specific purpose payments from the commonwealth to the states enable the commonwealth to pursue national objectives through services that are the constitutional responsibility of the states.
But they have become overused and misused. Reforming them means reducing their number (close to 100) and size and redesigning the way they work.
There are indications that COAG will reduce the number of specific purpose payments by grouping them. This would reduce costs but not necessarily reverse the drift of effective powers from the states to the commonwealth.
For that, some specific purpose payments would need to be cancelled and the overall amount reduced. The remaining specific purpose payments would then need to be redesigned to reduce commonwealth interference to the minimum necessary to achieve the legitimate national objective of each specific purpose payment and to refocus them on outcomes rather than inputs.
Third, in its pursuit of national economic reform, the federal Government intends to revive co-ordination with the states in areas such as business deregulation, infrastructure, water policy and various aspects of human services. There is undoubtedly a case for policy co-ordination to optimise the working of a federal system but it can be taken too far.
The essence of federalism is that the public interest is best served by each state pursuing itsown policies within its areas of constitutional responsibility. The case for a national approach to reform rests on whether co-ordination is necessary to achieve a legitimate national objective. Many interstate policy differences must remain if federalism is to deliver benefits such as interstate competition, policy experimentation and responsiveness to local preferences.
Fourth, squabbling among the states about the distribution of commonwealth general purpose grants (now GST revenue) is often dismissed as an inevitable result of a zero-sum game, but it would be a mistake to see it as nothing more than that.
The case for reform hinges on the extreme complexity and opaqueness of what is fundamentally a redistributive system. While most other federations across the world practice some form of equalisation, the Australian version is the most complex.
The Howard government, with the support of the states, initiated a review aimed at simplifying the system but this does not open up the fundamentals.
Fifth, the allocation of revenue-raising powers is heavily skewed in favour of the commonwealth. The states raise much less revenue than they spend. A degree of vertical imbalance is not unusual in a federation because centralised taxation tends to be more efficient and equitable.
In Australia's case, however, the imbalance is extreme and undermines the foundations of federalism. The culture of state dependency that it encourages is the antithesis of financial responsibility and accountability. Reducing the vertical imbalance requires a substantial reduction in commonwealth grants to the states (starting with specific purpose payments), offset by the transfer of some revenue-raising power from the commonwealth to the states. This is a case for a reallocation of tax powers, not for an increase or reduction in the overall tax burden, which is a separate issue.
Last, state taxation is also an important issue in its own right. The existing array of state taxes leaves much to be desired.
No tax expert, starting from scratch, would come up with a system that relies so heavily on narrowly based and distorting stamp duties, gambling taxes that raise social policy issues, and payroll and land taxes that are potentially efficient but in practice apply to a fraction of their potential bases.
Some of these problems could be addressed at little or no net cost in revenue, but solutions to others would be enormously costly - and therefore could not be financed out of existing state revenue sources - or would involve highly contentious trade-offs such as a sizeable cut in the tax-free threshold for payroll tax or a higher rate of GST. These issues need to be addressed as part of comprehensive reform.
It is early days yet, but from what is publicly known about the Government's plans for federalism, it appears mainly interested in pursuing reform of specific purpose grants and reinvigorated collaboration in national economic reform. No interest has been shown in a comprehensive review of the roles and responsibilities of commonwealth and state governments, horizontal equalisation, vertical imbalance or state tax reform, even though these are fundamental to the health of the federal system of government.
That is not to say that the Government's limited vision of federalism reform will not deliver benefits; it can, depending on the details that have yet to be filled in. But on one interpretation of the actions we have seen so far, co-operative federalism means more centralism. This would suit those who believe the states have outlived their usefulness, but it would amount to a rejection of the ideals and potential benefits of federalism.
Robert Carling is a former NSW and federal Treasury official and a senior fellow at the Centre for Independent Studies. His article on fixing Australian federalism appears in Policy magazine this week.
