tag:theconversation.com,2011:/es/topics/horizontal-fiscal-equalisation-11354/articleshorizontal fiscal equalisation – The Conversation2018-07-06T05:35:16Ztag:theconversation.com,2011:article/994392018-07-06T05:35:16Z2018-07-06T05:35:16ZWhy the government will be sending more GST funding to Western Australia<p>If the Commonwealth government’s proposed reforms for the distribution of the GST revenue between the States and Territories is implemented, about a billion dollars a year of additional commonwealth funds will be spent to ensure “<a href="https://theconversation.com/turnbull-government-says-no-losers-in-its-new-gst-carve-up-plan-99415">no state will be worse off</a>”. But where the extra funds will come from is left to the imagination. </p>
<p>A key aim of the reform is to reduce the wild swings in how much states receive from GST collected. The Productivity Commission <a href="https://www.pc.gov.au/inquiries/completed/horizontal-fiscal-equalisation/report">had recommended</a> GST be apportioned using an average of the states ability to provide services (known as “fiscal capacity”), but the government has decided to use Victoria and New South Wales as the benchmark.</p>
<p>Given both the current allocation and the proposed reform are instruments for meeting equity and efficiency objectives, the unknown loser is who pays for the additional commonwealth funding. </p>
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Read more:
<a href="https://theconversation.com/explainer-coag-and-the-gst-carve-up-40323">Explainer: COAG and the 'GST carve-up'</a>
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<p>GST is collected by the Commonwealth and then redistributed. The share of the GST given to each state is designed to meet the objective that “each of Australia’s States has the same fiscal capacity, under average policies, to provide general government infrastructure and services.”</p>
<p>The government’s proposed reform claims not to reduce the revenue provided to each state. However, it will change the relative shares of the larger sum to be allocated to the different states. </p>
<h2>Vital state revenue</h2>
<p>State and Territory governments depend on transfers from the Commonwealth government for <a href="https://www.budget.nsw.gov.au/">about half of their revenue</a>. </p>
<p>About half of this is special payments for things such as education, health, housing and infrastructure. The other half is the GST, and these funds are free for the states to spend as they desire. </p>
<p>How much each state receives is determined so that if each state applied similar state-based taxes, the revenue from state taxes plus their GST share would fund similar levels of state government services to its citizens - fiscal capacity. </p>
<p>Those states that have a greater ability to raise taxes (say they have a large mining industry) or can provide services more cheaply (due to a smaller remote and elderly population) receive less than an “equal” per capita share of the GST. </p>
<p>Currently, NSW, Victoria and Western Australia receive less than an equal per capita share of GST. </p>
<p>By contrast, states who can raise less revenue, or have a higher cost of providing services, receive more than an equal per capita share. </p>
<p>South Australia, Tasmania and the Northern Territory are all currently net recipients of GST - they receive more than they pay in.</p>
<h2>Changing the distribution</h2>
<p>Giving some states more and others less than an equal per person share of GST is done for both equity and economic efficiency. For equity, the idea is that citizens in similar incomes, demographic and other circumstances should enjoy similar levels of state government services regardless of where they live. </p>
<p>For efficiency, the distribution aims to neutralise the need for different state tax rates; if the states are to fund similar levels of services, particularly on mobile labour and capital.</p>
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Read more:
<a href="https://theconversation.com/factcheck-is-the-gst-as-efficient-but-less-equitable-than-income-tax-45052">FactCheck: is the GST as efficient but less equitable than income tax?</a>
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<p>Up until the mining boom the current distribution of GST revenue among the states was generally accepted. </p>
<p>But the large increase in mineral royalties, and especially iron ore in WA, resulted in WA shifting from being a net recipient to receiving only a third of a per capita share in 2017-18, many years after the end of the mining boom. </p>
<p>The data used to determine the allocation of GST lags, meaning the 2017-18 allocation is based on average 2012-13 through 2015-16 data.</p>
<p><a href="http://www.abc.net.au/news/2018-04-08/wa-gst-ripoff-continues-under-labor-despite-barnett-criticism/9626240">Western Australia</a>, and more recently the <a href="https://www.ntnews.com.au/news/northern-territory/northern-territory-loses-cash-in-gst-distribution/news-story/568b8e9f8d277695a1f0215ebee987fb">Northern Territory</a>, have been vigorous critics of their smaller share, and at the same time South Australia has <a href="https://www.news.com.au/national/south-australia/state-government-to-reject-any-change-to-gst-share-for-south-australia/news-story/d0b3c5b036a51ab40525063cd8425283">vigorously argued they retain at least their current share</a>. After all, resolving these conflicting political claims is a <a href="https://www.investopedia.com/terms/z/zero-sumgame.asp">zero-sum game</a>!</p>
<h2>Introducing a benchmark</h2>
<p>In order to deal with wild swings, such as that introduced by the mining boom, the Productivity Commission (PC) considered several reform options. </p>
<p>A key proposal was to replace the current model of bringing all states up to the fiscally strongest state with a more stable benchmark. </p>
<p>The preferred benchmark proposed in the draft report was the second highest state. The final report recommended an average across the states. The commission assumed a larger share for one state would mean a smaller share for other states.</p>
<p>But the federal government’s proposal includes additional funds to top up the GST.</p>
<p>The federal government’s interim response to the PC final report has a few more differences to the PC’s recommendation. </p>
<p>The benchmark for allocation will be the fiscal capacity of NSW or VIC, whichever is the largest. This will provide stability for major structural and cyclical economic shocks, and a high level of fiscal capacity for state government services. </p>
<p>A “floor” will also be established at 0.7 to 0.75 of the benchmark, creating a safety net.</p>
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Read more:
<a href="https://theconversation.com/was-economic-mismanagement-is-not-a-reason-to-review-how-the-gst-is-carved-up-76944">WA's economic mismanagement is not a reason to review how the GST is carved up</a>
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<p>The recommended reforms for distribution of the GST revenue between the states by both the PC and the commonwealth government seek to reduce volatility of the shares while roughly maintaining previously accepted principles of equity and efficiency. </p>
<p>For the additional revenue cost, the commonwealth government argues no state will be worse off.</p><img src="https://counter.theconversation.com/content/99439/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The unknown loser is who pays for the additional Commonwealth funding.John Freebairn, Professor, Department of Economics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/406912015-04-23T20:21:03Z2015-04-23T20:21:03ZFederalism at stake if $4b is cut from schools and hospitals<p><a href="http://www.theaustralian.com.au/national-affairs/treasury/budget-locks-in-billions-in-funding-cuts-to-states/story-fn59nsif-1227316180927">Reports</a> that Federal Treasurer Joe Hockey has refused to back down on plans to strip $A4 billion from school and hospital funding in the May budget will do little to repair relations between the States and the Commonwealth.</p>
<p>Still smarting from recent <a href="https://theconversation.com/federalism-the-loser-as-hockey-ransoms-gst-to-push-wa-reforms-40085">stoushes</a> over the GST carve-up, the federal and state governments have more conflict ahead – despite stated commitments to the concept of federalism in Australia.</p>
<h2>Surprise and outrage</h2>
<p>In May last year, the Abbott government took the States completely by surprise when it announced on Budget night that the Commonwealth would be withdrawing $A80 billion in federal funding of health and education that had been agreed to by the previous Labor government. </p>
<p>State premiers were stunned and outraged. They had met just days before with prime minister Tony Abbott at a Council of Australian Governments (COAG) meeting and not even an indication of this move was given there. Their shock has since subsided but the outrage certainly has not. </p>
<p>At last week’s COAG meeting, when the West Australian Premier Colin Barnett was not complaining bitterly about his State’s <a href="https://theconversation.com/explainer-coag-and-the-gst-carve-up-40323">share of the Goods and Services Tax</a> (GST) revenue distributed by the Commonwealth Grants Commission, the Premiers were otherwise as one in wanting to <a href="https://theconversation.com/more-than-one-elephant-in-the-coag-meeting-room-40381">talk</a> seriously with Abbott about the way forward on essential <a href="https://theconversation.com/grattan-on-friday-gst-and-health-test-abbott-in-fractious-federation-40342">services</a> in health and education</p>
<p>In the end, Abbott agreed to a special “COAG Retreat” in July – a new phenomenon in the 23-year history of the body – where these difficult issues might be discussed. The plan is to do so in conjunction with the Commonwealth’s forthcoming Tax and Federation White Papers “with a view to optimising outcomes for patients and students”, according to the COAG <a href="https://www.coag.gov.au/sites/default/file/COAG%20Communique%2017%20April%202015.pdf">communique</a> released at the end of the April 17 meeting. Crucially, the Communique also acknowledged the following:</p>
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<p>Any federation reform will need the states, territories and Commonwealth to work together to meaningfully address these long-term funding pressures and also look at structural reforms to ensure services can be delivered in the most efficient way… COAG reiterated that governments need to be certain they would have appropriate revenue to meet their responsibilities.</p>
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<p>Nice words, but little more than that, if yesterday’s <a href="http://www.theaustralian.com.au/national-affairs/treasury/budget-locks-in-billions-in-funding-cuts-to-states/story-fn59nsif-1227316180927">remarks</a> by Treasurer Joe Hockey are anything to go by. Unlike Abbott, Hockey likes to talk tough to state premiers – possibly because they are one of the few groups in the country he feels free to take a swing at in the run-up to this year’s budget. </p>
<p>Hockey has refused to reverse the cuts to Commonwealth funding in health and education to the States which were announced last year. This rejects calls from the premiers, particularly the recently re-elected Mike Baird in NSW, for the issue to be addressed urgently and not shelved for consideration later under the White Paper process. </p>
<p>Showing pretty scant regard for any awkwardness Abbott might have to endure around the barbeque at the COAG retreat in a few weeks, Hockey said:</p>
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<p>The states need to accept responsibility for the things they run. If they do that and if we’re all accountable for the things we are actually responsible for, we’ll have a more efficient system.</p>
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<p>It is hard to imagine language more likely to inflame the sense of frustration and anger amongst the nation’s Premiers. It doesn’t really smack of everyone coming to “work together” on the long terms structural problems facing the Australian federation, now does it?</p>
<h2>Federalism at stake</h2>
<p>Hockey’s intransigence over the funding cuts – not to mention his stylistic flourishes of ambush with a chaser of patronising cant – sits very oddly with any sincere attempt at meaningful reform of Australia’s federal system and the way in which the government sector gathers and distributes revenue.</p>
<p>As other policy “<a href="https://theconversation.com/abbott-says-he-just-has-to-get-off-a-couple-of-barnacles-34665">barnacles</a>” have been discarded by the Abbott government, laying the ground for structural reform has assumed an even greater importance in its search for that elusive grail of contemporary politics – a coherent narrative. But this is not oppositional politics – if the States and Territories are alienated from the reform process then it simply stalls. </p>
<p>Additionally, Hockey’s stance is an absurdity, as well he knows. The Commonwealth collects over 80% of the revenue taken by government in this country, while the States take only around 16%. The Commonwealth raises more than it needs to meet its own responsibilities, squeezing the States out of raising enough to meet theirs – which just happen to include the increasingly costly areas of health and education. </p>
<p>For this reason, about a quarter of the money raised by the Commonwealth is transferred to the States, amounting to roughly 40% of their revenue. The undesirability of this – known as “<a href="https://theconversation.com/au/topics/vertical-fiscal-imbalance">vertical fiscal imbalance</a>” – was highlighted by the National Commission of Audit <a href="http://example.com/">report</a> delivered to the Abbott government a year ago. It also lies at the heart of the<a href="http://bettertax.gov.au/publications/discussion-paper/"> Tax White Paper</a> and explains why that is being coupled to its twin on reform of the Australian Federation.</p>
<p>In other words, at the same time Hockey is lecturing the States about the need to “accept responsibility for the things they run”, the government is engaging in policy processes that frankly acknowledge – indeed, are premised upon – the fact that the States are stymied from meeting their responsibilities without Commonwealth assistance. And this is because the latter simply takes too much of the nation’s tax revenue pie.</p>
<p>Sadly, it’s not just hypocrisy. The government’s attempt to engage the States on one hand while whipping them with the other does not augur well – both for the looming funding crisis in health and education and also the achievement of lasting federal reform.</p><img src="https://counter.theconversation.com/content/40691/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Lynch receives funding from the Australian Research Council for research on federalism and constitutional law.</span></em></p>The government’s attempt to engage the States on one hand while whipping them with the other does not augur well for tackling growing health and education costs – or for lasting federal reform.Andrew Lynch, Professor, Gilbert + Tobin Centre of Public Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/313732014-09-14T20:20:41Z2014-09-14T20:20:41ZRenewing Australian federalism<figure><img src="https://images.theconversation.com/files/58833/original/2pm37qyc-1410489625.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The way we are governed has changed radically from the world of the Constitutional founders.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/alegrya/6638970347/in/photolist-b7EszZ-b7EEZM-b7EwjV-8CGrYK-b7Ev8p-b7DZcn-dTVx2w-6EZu9V-7tb9mn-fEv6JT-bPdrAn-bPdome-bPdnTX-bAiLkd-bAiGAQ-7tf8r1-7tkXW4-7tpR7W-bPdiua-7tkS3Z-7tb5an-nTs4ve-62nCfU-odNkX6-ihND2e-oMWzp2-ovJqtx-oLbDUJ-oMWzfp-9o3Nc8-xauwm-7tfa1G-7teUj9-7tbdB4-xauVF-7teXGQ-7tb6zp-7taXTH-7tf5Cq-7teYVY-7tkQJn-7tbk8e-7teQKo-7t7ieD-7tpTe9-xauq8-oc5f5j-dV6u1v-ovHKm6-oNdxBr">Flickr/Alison Young</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p><em>The reform of Australia’s federation is under review, with a White Paper process currently underway. In partnership with the Australian National University’s Tax and Transfer Policy Institute at the Crawford School of Public Policy and with the University of Melbourne School of Government, we have asked leading Australian academics to begin a debate on renewing federalism, from tax reform to the broader issues of democracy.</em></p>
<p><em>Kicking off the series today, Professor Miranda Stewart considers what reform issues should be foremost.</em></p>
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<p>Australia is a country that benefits from great political and legal stability. We are, in 2014, one of the older and most stable federations in the world. Our short written Constitution, famously amended only <a href="http://www.peo.gov.au/learning/fact-sheets/australian-constitution.html">eight times</a> following successful referendums, still stands in the language of more than a century ago. To be honest, this can make debates about the federation seem pretty dull, and talk of changing how it all works seem unachievable.</p>
<p>But it would be wrong to assume that the law and norms that establish how we fund and run government are unchanged. In fact, Australia as a country, and the way we are governed has changed radically from the world of the Constitutional founders. </p>
<p>That change has taken place mostly without Constitutional amendment, and in response to changing popular demands for equality, welfare and redistribution, and changing economic circumstances globally and nationally.</p>
<p>The White Paper <a href="http://www.pm.gov.au/media/2014-06-28/white-paper-reform-federation">terms of reference</a> announced by Prime Minister Tony Abbott are wide-reaching, carefully reasoned and cover all the bases. They were generated in consultation with the States and Territories.</p>
<p>At bottom, the mood of the federal government, as well as the global and economic realities that Australia is facing in coming decades, are about cost. There are some important implications for all Australians in the White Paper terms of reference and most of them come down to your money - that is, to taxing, spending and democratic accountability for public provision by all levels of government.</p>
<p>First, taxes. The White Paper states the blunt challenge of “how to address the issue of State governments raising insufficient revenues from their own sources to finance their spending responsibilities”. While this implies that <a href="http://www.treasury.qld.gov.au/office/clients/commonwealth/intergovernmental/vertical-imbalance.shtml">vertical fiscal imbalance</a> is new, it has been an issue for <a href="http://www.hetsa.org.au/pdf/36-A-03.pdf">most of the last century</a>. </p>
<p>Our biggest and most effective taxes, the GST and income tax, are federal and should apply nationally - for efficiency and social equality reasons. State and local governments are much better placed to levy land taxes, royalties on resource production, user fees and charges for services and activities in each state. It is often considered that accountability and spending follow taxing powers. </p>
<p>But does this really mean we should hand the power to tax - and to compete down the rates and base - to the states, for our biggest national taxes? </p>
<p>Second, what about inequalities between states, in terms of taxing capacity and cost of government? Currently, the GST is distributed to State and Territory governments according to a <a href="https://www.cgc.gov.au/index.php?option=com_content&view=article&id=37&Itemid=153">horizontal fiscal equalisation</a> formula applied by the Commonwealth Grants Commission. The formula works on a national average of revenue and spending for State and Territory governments, based on the last three years. At present, New South Wales, Victoria and Western Australia are contributing to support South Australia, the Northern Territory and Tasmania. </p>
<p>That means that Western Australia gets less as it comes off the mining boom - but in the early boom years, it got a larger amount. Prime Minister Tony Abbott has <a href="http://www.skynews.com.au/news/politics/national/2014/09/02/abbott-hoses-down-coalition-gst-battle.html">stated</a> that if HFE is to be re-examined, the smaller states would need to be protected and this should be negotiated between the larger - or wealthier - states. </p>
<p>The formula in general terms aims to support equality in opportunity through provision of public goods for people across Australia, while not leading to a free ride in which some State or Territory governments do not tax enough, and also spend their funds poorly.</p>
<p>Third, the White Paper terms of reference emphasise removing “duplication” in government. Just because the Commonwealth government is best placed to raise taxes nationally does not mean it should be in charge of all spending. The Commonwealth is good at making payments to individuals: the social security system. Australians think this is important: we <a href="http://www.aph.gov.au/About_Parliament/Senate/Powers_practice_n_procedures/%7E/link.aspx?_id=F74707A5A4934E05A67EE5969B156435&_z=z">put this into the Constitution</a>, in s 51(xxiii) and expanded Commonwealth powers in 1946, in a successful referendum (s 51(xxiiiA)). </p>
<p>But the Commonwealth is much less good at service delivery. There is increasing impatience with the proliferation of responsibilities between State, Territory and the Commonwealth governments across areas as diverse as mental health, education, age care, welfare interventions and environmental policy. We can find better ways to ensure that State governments, and the cities and localities in their domain, which are good at public goods and service delivery, can do that. We also need to learn to distinguish between “Commonwealth” policy and “national” policy. </p>
<p>Should we go down the path of Canada and <a href="http://www.cicic.ca/en/702/ministries-of-education.canada">not have a federal department of education at all</a>? It would help if the Commonwealth government could restrain itself from saying or doing things on, say, <a href="http://blogs.unimelb.edu.au/opinionsonhigh/2014/06/23/evans-williams/">chaplains</a>, or <a href="http://www.theage.com.au/news/national/kids-may-need-the-strap-abbott/2007/06/15/1181414549921.html">corporal punishment</a> in schools - neither of which is a Commonwealth function. </p>
<p>More fundamentally, we need to be careful that the debate about who has power to spend, or about duplication, does not obscure the question about how governments best deliver public goods and programs to individual citizens.</p>
<p>This Forum aims to start the Conversation about renewing our federation. It brings together diverse perspectives from politics, law, economics and social policy to debate the key issues, with a focus on fiscal and democratic accountability issues, and on the hot topic of education. </p>
<p>We hope it will provoke some thoughts on how we can pursue federal reform to support both sustainable financing for government and a good society for all Australians in future. </p>
<p><em>Our Renewing Federalism series will culminate in a symposium on October 2 at ANU. If you would like to attend the event, please see event details and <a href="https://taxpolicy.crawford.anu.edu.au/events/4661/renewing-australian-federalism-starting-conversation">RSVP here</a>.</em></p>
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<p><strong>Read more in the series <a href="https://theconversation.com/au/topics/renewing-federalism">here.</a></strong></p><img src="https://counter.theconversation.com/content/31373/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart receives funding from the Australian Research Council and with the Melbourne School of Government, from the Victorian Department of Premier and Cabinet for the project <a href="http://www.government.unimelb.edu.au/renewing-federalism">http://www.government.unimelb.edu.au/renewing-federalism</a> .</span></em></p>The reform of Australia’s federation is under review, with a White Paper process currently underway. In partnership with the Australian National University’s Tax and Transfer Policy Institute at the Crawford…Miranda Stewart, Professor and Director, Australian Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/280402014-07-06T20:14:52Z2014-07-06T20:14:52ZHow we can reinvigorate the Australian Federation<figure><img src="https://images.theconversation.com/files/52992/original/t6gzk279-1404439537.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There have been instances of successful federalism - how do we return to these?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/monkeyc/102307345">Flickr/monkeyc.net</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>When our two major levels of government work in partnership, our Federation can function well. The standout period for cooperative federalism was the Hawke/Keating term of government, producing the National Competition Policy, the east coast power grid, a national rail agreement, harmonised regulation and consumer standards, and mutual recognition of many policies and occupations. </p>
<p>More recent examples are the Intergovernmental Agreement on <a href="http://www.budget.gov.au/1999-00/bp3/bp3-Chapter.html">Reform of Commonwealth–State Financial Relations</a> (1999), the <a href="https://www.coagreformcouncil.gov.au/agenda">National Reform Agenda</a> (2008), the <a href="http://www.federalfinancialrelations.gov.au/content/intergovernmental_agreements.aspx">Intergovernmental Agreement on Federal Financial Relations</a> (2011), and the National Disability Insurance Scheme.</p>
<p>Notwithstanding those successes, the post-World War II drive to centralise power in Canberra has made the Federation increasingly unbalanced. The division of roles and responsibilities has blurred and much overlap and duplication has been created. Political and administrative accountability has become unclear and significant inefficiency and shortcomings in service delivery have resulted.</p>
<h2>Pushing from both sides</h2>
<p>Despite its far greater command over revenues, the Commonwealth tends to push its financial problems onto the States – as it seeks to do in the recent budget. And the States, too, are not above a little cost-shifting to the Commonwealth. </p>
<p>The direct consequence has been proliferation of Commonwealth payments and involvement in areas of State responsibility. Ten years ago, there were fewer than 100 of these partnership agreements (as they are now known) – still too many - but since then (as noted by the Commission of Audit) the number has grown to 144. Each ties payments to priorities and conditions set by the Commonwealth, and most involve excessive red tape and reporting requirements.</p>
<p>While there are some legitimate grounds for a (limited) Commonwealth role in ensuring nationally consistent services, politics - not just policy - is a driver. There is an increasing desire by Commonwealth politicians to “tag” benefits to particular groups in the community as federally provided.</p>
<p>In the best cases, national partnership agreements delivering extra dollars to core service areas like health and education can lead policy without imposing uniform delivery mechanisms, spurring enough competition among the States to provide innovation in service delivery. </p>
<p>But the Commonwealth, particularly the Commonwealth bureaucracies involved, have increasingly sought to control, prescribe and micro-manage, often down to very detailed operational levels. </p>
<p>These burdensome compliance demands often create tension between levels of government rather than promoting cooperation, bloating bureaucracy at both levels. They typically lack incentives or frameworks for pursuing efficiency, and they blur political and administrative accountability.</p>
<h2>Ingredients for successful reform</h2>
<p>Yet there have been periods of successful cooperative federalism in the past - as noted earlier, during Hawke/Keating term of government. So what can we learn?</p>
<p>Firstly, we should forget the occasionally heard proposals that we should get rid of the States and adopt a unitary form of government (with some kind of regional underlay). It won’t happen.</p>
<p>Hence, the starting point for negotiating roles and responsibilities is that the states must be treated as the sovereigns that they are, with clearly defined sovereign areas of jurisdiction. </p>
<p>Other ingredients required for successful reform are: </p>
<ul>
<li>commitment to rational, evidence-based policy in the national interest, with purely political considerations marginalised; </li>
<li>leadership and demonstration of trust; </li>
<li>open communication, and </li>
<li>commitment to sharing of resources, including revenues, responsibilities and expertise, to achieve efficient outcomes.</li>
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<p>Reforms to the Federation (presumably via a new Intergovernmental Agreement rather than constitutional amendment) must be based on:</p>
<ul>
<li>Mutual recognition of sovereignty</li>
<li>National interest</li>
<li>Subsidiarity</li>
<li>Efficiency</li>
<li>Accountability.</li>
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<h2>Working together</h2>
<p>There is substantial scope to reduce overlap and duplication, identify the areas where both major levels of government do need to be involved and to cooperate, and clearly define respective roles and responsibilities.</p>
<p>There are a number of areas where joint involvement of both levels of government appears inevitable, and desirable. The most obvious are: health; transport and transport infrastructure (at least on inter-state or national routes); other major infrastructure (e.g. power grids, rail networks, broadband), and the environment, including climate related issues, major river systems.</p>
<p>There are instructive models overseas for determining respective roles in these areas, in the US, Canada, post-war Germany and in the suggestions in the report of the Australian Advisory Committee on Intergovernmental Relations.</p>
<p>How should agreement on roles in shared areas be approached? A reformed Federation would incorporate a new model of partnership agreements embodying agreed outcome objectives and arrangements designed as a true partnership model, with mutually balanced obligations and contributions. There should be sharp clarity around which each role is exercised, who is responsible and accountable for what. </p>
<p>There should be an emphasis on efficiency, flexibility, and minimising administrative burdens, a major focus on dynamic improvement, stimulated by diversity and a degree of competition across states in policy design and in delivery solutions.</p>
<p>Ideally, the Commonwealth should provide leadership on broad national policy directions, minimum national standards, national consistency where important (especially in business regulation) and the provision of funding.</p>
<p>States should tailor services to local needs, coordinate delivery and drive policy and delivery innovation. Local government should also concentrate on delivery of services and delivery innovation.</p>
<h2>Have the tax debate</h2>
<p>But no reform will last without tackling the cause of the march to centralism: the vertical fiscal imbalance (VFI). The 2014 Commonwealth Budget’s squeeze on future Commonwealth contributions to health (especially hospital) and education funding via the states is apparently designed to encourage the states to press for an increase in the GST. </p>
<p>I think that is inevitable, whether it comes from the states or, more likely, the Commonwealth and whether it involves broadening the GST base or increasing the rate, or ideally both. (Compensation to those most affected such as pensioners and low income working families is critical.)</p>
<p>The National Commission of Audit’s proposal for the States to again share the personal income tax base is not new, but it is in my view a very good one. It is the only constitutionally (relatively) secure way to reduce the VFI substantially and to protect the new balance for the future. </p>
<p>It should be in the GST debate. Either extending or raising the rate of the GST will help resource the States (if the additional proceeds go to them), although it will again increase the VFI ‒ whose adverse effects are exacerbated by the distortions of our extreme horizontal fiscal equalisation (HFE) system (but that is a topic for another day).</p>
<p>There are various ways for the States to share the income tax base so total income tax doesn’t rise, and that the ATO still administers a single income tax return and collection system. Each State or Territory would receive:</p>
<ul>
<li>a flat percentage (say 10%) of each resident’s above-threshold income, or </li>
<li>simply a given percentage of total income tax paid by each resident,</li>
<li>plus scope for the State or Territory to surcharge/discount on its own responsibility.</li>
</ul>
<p>State politicians would thus have to take responsibility and political accountability for raising their own revenue (at the margin). And States should also agree to better manage and improve yield from their own existing tax bases, notably the best one they still control alone: payrolls. </p>
<p>The Commonwealth would reduce grants (and the extent of its involvement in many areas) ‒ and even take back some (or perhaps even all?) of the GST proceeds, to the extent of net additional funds that States and Territories achieve from the income tax (ignoring surcharges or discounts).</p>
<p>It is to be hoped that the present Commonwealth Government’s White Paper review of the Federation approaches its task on the basis of key reform principles implied by those lessons from past successes. </p>
<p><em>This is an edited extract of a paper presented at the <a href="https://www.melbourneinstitute.com/Outlook_2014/program.html">Melbourne Institute’s 2014 Economic and Social Outlook Conference</a>.</em></p><img src="https://counter.theconversation.com/content/28040/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vince FitzGerald is a member of The Conversation's board of directors.</span></em></p>When our two major levels of government work in partnership, our Federation can function well. The standout period for cooperative federalism was the Hawke/Keating term of government, producing the National…Vince FitzGerald, Member of the Board of Governors, ANU Foundation for Excellence, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.