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More than one elephant in the COAG meeting room

Members of COAG listen to Prime Minister Tony Abbott at the top of this morning’s meeting at Parliament House. AAP/Stefan Postles

Leaders were all crooning the same reassuring tune at the Council of Australian Governments news conference – about their constructive talk and co-operation – until an angry Colin Barnett declared he must have been at a different meeting.

“The elephant in the room is the GST and that’s what this COAG has been significantly about,” the West Australian premier said, as Tony Abbott and other leaders looked awkward.

Barnett had failed to get his way. The relativities for the GST carve-up recommended by the Grants Commission will stand, Abbott said, for “the next year or two”.

It was a victory for the other states, which had unanimously opposed the WA pressure for its share not to be reduced, as it is under the Grants Commission’s recommended distribution.

But the federal government will throw WA a bone, in the form of some help with its present financial difficulties, which are caused by both the GST cut and the fall in the iron ore price.

The assistance is being worked out bilaterally. Abbott was anxious to say he wouldn’t just be handing over a pot of money, but pointed in the direction of some help with infrastructure.

As well, “the merits of the current system of GST distribution” will be examined in the government’s coming white paper on the federation. Abbott flagged he was prepared to consider a floor being put under what a state gets from the GST pool.

So WA has come away from COAG with something, but as far as a “floor” goes it is vague and in the future.

The prime minister held the line against Barnett to a surprising degree. The signs had been that WA was wielding considerable clout. Treasurer Joe Hockey (who has been in the US for the past few days) had given the impression last week that he would make a determination about the GST allocation in coming weeks, rather than the matter being settled at COAG.

Finance Minister Mathias Cormann, from the west, had publicly suggested that current relativities should be frozen. Cormann is not normally a man to go out on a limb.

The federal Liberals have their political difficulties in WA. This could be a point of leverage for the state in the bilateral talks.

Barnett showed some open contempt for state colleagues in his comments (although he praised Abbott for trying to assist). “I don’t know how we’re going to reform Australia and modernise it when we can’t tackle an issue which is so inequitable and also has the effect of penalising success and rewarding weakness or failure,” he told the joint news conference.

But the other premiers were equally infuriated by Barnett’s all-guns-blazing approach of the past couple of days. Any attempt by Abbott to favour him by disadvantaging them would have risked a serious revolt.

While the other leaders pushed back WA on GST, there was also push back against Abbott on the issue of hospitals and schools funding.

NSW Premier Mike Baird has been particularly determined to turn up the heat over the immense squeeze last year’s budget foreshadowed. The budget said the government was changing indexation arrangements for schools from 2018 and hospitals from 2017-18 and removing funding guarantees for public hospitals.

“These measures will achieve cumulative savings of over $80 billion by 2024-25,” it said. The states screamed at the time but to no avail.

Now the states have insisted this issue become part of the discussions about federalism and tax reform. The communique said “COAG reiterated that governments need to be certain they would have appropriate revenue to meet their responsibilities. This will be a key consideration of both the tax and federation white papers.”

It’s impossible to know what will come out of the debate. But the states do have some bargaining power. They can make or break the prime minister’s review of federal-state relations.

Abbott is calling a July leaders' retreat, with no officials, to discuss fundamental reform of the federation. To achieve reform “we will have to be prepared to leave partisanship at the door,” he said, also noting that for the next year or so Australia had “an election-free zone” which should “give us an unusual window of opportunity for significant structural reform if we are prepared to grasp that nettle.”

The premiers might be willing to leave partisanship at the door but they certainly won’t go into such a meeting forgetful of the imperatives of their own budgets.

Baird said the focus of the coming discussion would be on health and education – “patients and students.”

“What are the outcomes that we can achieve that is best for them and delivered in the most efficient way?” As to funding, he said “what is important is there is an acknowledgement that the funding gap must be addressed, but it will be done jointly” between Commonwealth and states.

The implications of this debate about financing being reopened are considerable, putting pressure on the federal government over coming months.

As one state official said after the meeting: “This is the real elephant in the room – the ability of health spending to bust the states unless systemic solutions are found.”

Who thinks adults don’t fight over (tax) money?

Peter Costello believes the Liberals are destroying their economic credentials. AAP/Alan Porritt

It’s no secret that Peter Costello doesn’t give a high mark to the Abbott government, and every now and then he uses his column in News Corp papers to call it out. The former treasurer understands how lethal his written bullets can be.

Costello on Tuesday waded into Treasurer Joe Hockey’s tax “conversation” to say the government’s discussion paper had talked about “lower, simpler, fairer” tax but had prompted a flood of demands for higher and more complicated taxes.

“‘Lower, simpler, fairer’ is looking like some kind of morbid joke,” he wrote.

He also emphasised the burden of bracket creep – there had been no adjustment to the tax thresholds for five years.

“The government needs to restart the conversation about getting taxes down, not up,” he said.

Costello is partly defending his own record: much of the current debate is critical of the generous superannuation concessions he put in place. But he also believes the Liberals are destroying their economic credentials.

Certainly it’s clear that the government doesn’t have much control over the tax “conversation”.

Unsurprisingly, the former treasurer gets under the skin of the present one (who knows he’ll forever suffer in the comparison). Joe Hockey responded from New York that people should “stop looking back to what it was and focus on the challenges of today and the challenges of tomorrow. No matter who they are, we’ve got to look to the future rather than longing for yesterday.”

And “I really wish I had the revenue coming into the budget that Peter Costello had”, he said. “If I had the same revenue as he had then I’d be getting $25 billion extra each year to be able to spend on things.”

There is no doubt the iron ore price fall has created a major revenue problem for the federal government - and for the state of Western Australia, which is also facing a cut in its GST share.

But, when it comes to winning sympathy, to an extent it’s a matter of what goes around comes around, in both Hockey’s case and that of WA.

Hockey didn’t cut the Labor any slack when it had to announce revenue revisions. And WA did very well out of the national tax pie in earlier times.

When Tony Abbott tells the states to be “adults” and sort out the stoush over WA’s GST share, he is apparently forgetting the joke about not getting between a premier and a bucket of money.

The other states are showing no sign of giving in to the anger of WA, which is contesting the recommendation from the independent Grants Commission.

Although Abbott and Hockey want WA accommodated the Prime Minister, who will discuss the row with state and territory leaders at the Council of Australian Governments this week, is reluctant to wear the odium of the federal government imposing a position.

“The states and territories really should sort this out amongst themselves,” he said on Tuesday. “It’s money that belongs collectively to them and collectively they should make a decision and being the grown-up adult governments that they are, that’s what I expect them to do.”

If it is up to the states alone, WA can expect to be voted down.

The other states argue that WA benefited for a long time under the Grants Commission’s recommendations and should accept the outcome when circumstances change.

As NSW Liberal Treasurer Gladys Berejiklian said on Tuesday: “The process needs to be respected. You simply can’t make exceptions which ultimately jeopardises the integrity of the process.”

Her point is backed by economic commentator Tim Colebatch who, writing for Inside Story, outlines the “good reasons for the apparent injustice” to WA.

“First, the rule Western Australia wants to change is the one that’s given it more than $7 billion over the past four years that would have gone to the other states if the GST money had been distributed in the way it now urges.

“Second, the system it wants to overthrow – in which the Commonwealth Grants Commission proposes how federal money should be split among the states, based on their relative needs – has subsidised Western Australia by tens of billions of dollars (in today’s money) over the decades, and that money has come from the taxpayers of New South Wales and Victoria.

“Third, Western Australia’s actions since 2011 suggest that once it saw that the system would begin working against its interests, it set about escalating the stakes to the point where the distribution of grants would seem manifestly unfair and the system would be scrapped.”

In light of this, wouldn’t other states be mugs to give in to WA?

Hockey’s line that the situation can be used to put pressure on WA to make reforms in areas such as shopping hours and assets sales doesn’t wash. Why should other states have to forfeit revenue to bribe WA to do what it should do anyway?

Abbott didn’t want to be drawn on what would happen if there were no consensus. When asked, Hockey’s office repeated what he said after the fractious meeting of treasurers last week. “The Treasurer is in consultation with the states and will make a determination after those consultations.”

The GST is not the only money matter premiers will have on their minds at COAG. There is the ongoing row over federal cuts in future health and education funding, which NSW plans to push. These cuts were flagged in last year’s budget.

Berejiklian says: “We have always said there are funding gaps in health and education over the medium to long term that we aren’t even close to fully funding, and we will continue to make it very clear that we want our fair share.”

NSW says that in health, at budget time last year its cumulative funding loss from the Commonwealth changes was estimated at around $16 billion per annum by 2050-51 (in 2014-15 dollars).

Whatever way you look at it, Friday’s COAG is likely to see a good deal of unco-operative federalism.

Listen to the latest Politics with Michelle Grattan podcast, with Industry Minister Ian Macfarlane, talking the energy white paper, nuclear power and more, here.

Government and business are their own worst enemies in the pursuit of reform

It is hard see Joe Hockey’s claim not being marked down if he wrote it in response to a question in a first year university economics exam. AAP/Tracey Nearmy

Anyone who believes we really do need more economic reform might well despair at the inability of the government to effectively prosecute it and the business community to successfully advocate it.

No wonder the public is sceptical. Between them, the government and its business backers have botched the process so far and there is little reason to be confident they’ll do significantly better in future.

Research commissioned by the Business Council of Australia and reported this week has found that 62% say they don’t trust the government to manage tax reform well enough to create a better system overall.

And why would they when, for example, Treasurer Joe Hockey says (yet again in Tuesday’s Australian) that our tax system was built before the 1950s and “we have almost exactly the same tax system” as then?

Do we really? Many big changes have been made since the 1950s. If we removed the GST, scrapped capital gains tax and fringe benefits tax, and brought back probate tax, would Hockey say that would amount to “almost exactly the same tax system” as now?

Surely not. It is hard to see the Hockey claim not being marked down if he wrote it in response to a question in a first-year university economics exam.

Hockey might be trying to make a point about the slices of direct versus indirect taxation, the effect of disruptive technology, or the threat to revenue of profit shifting by multinationals.

But if you want to build a case for change, don’t take people for mugs and don’t exaggerate. Don’t, for instance, give the Intergenerational Report a precision about the 2050s that can’t be properly claimed.

And don’t overreach, as government and business did when Tony Abbott came to power.

We need not again detail the massive disaster of the 2014 budget to illustrate how badly the government has performed. It’s etched in the memories of players and public. The reform well remains poisoned by it.

Before that, we saw how business overreached. The then-president of the Business Council of Australia, Tony Shepherd, led the Commission of Audit; the BCA’s then chief economist, Peter Crone, headed the secretariat. The report lacked the realism that was needed to advance the reform cause.

Now, as the second budget approaches, there are tears and snarls among friends.

A group of nine business organisations said in an opinion piece published on Tuesday: “With the prime minister signalling a ‘dull’ budget and the opposition leader continuing to focus almost exclusively on budget ‘fairness’ you could be mistaken for thinking there is no significant problem with the state of the nation’s finances.”

“We cannot continue to mortgage our nation’s future on the questionable assumption that we may be in a better position to fix the budget on the never-never.”

Governing was not just the responsibility of government, but the duty of all MPs. “We must stand on the shoulders of reform giants [Hawke, Keating, Howard, Costello] before it is too late,” they wrote.

The business groups' intervention drew a snippy response from Social Services Minister Scott Morrison. “Businesses are entitled to their view but I noticed they were pretty quiet in their support for Mike Baird,” he said. “I remember seeing lots of ads from the union movement saying why poles and wires shouldn’t be sold. I don’t remember too many business-funded ads actually supporting the case that Mike Baird put forward but they will be enormous beneficiaries.”

Business is among many interests – though obviously of particular importance – that put wish lists to government. The Abbott government, sharing common priorities, elevates business and gives it more of a hearing than that accorded to many other groups. This was obvious even during last year’s G20, when the B20, representing business, had a special “in”.

The sympatico hasn’t precluded knockbacks to business, as the government attacked “corporate welfare”. But it has meant that its closeness to a hardline business ideology has led to some government misjudgements and poor decisions, and notably to its failure to understand the importance of having difficult reforms being seen as fair.

We don’t have the full details of the BCA-commissioned research, done by Crosby Textor. But according to the BCA, as well as the high level of distrust of the government to handle tax reform, the qualitative research showed that people fear vocal minority groups, including business and others, will have more sway over the reform and that the voice of everyday Australians will not be heard.

Both government and BCA say they are committed these days to inclusive approaches to reform.

Voters, however, are highly cynical and increasingly inclined to dismiss hyped claims. They will take some convincing about how genuine the government’s inclusiveness is. It’s no good just banging on about a “conversation” and pointing to a website.

The best way for contemporary reformers to make progress would be to put aside the hyperbole and narrow the ambitions into a manageable agenda, however much this might go against the grain.