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New federalism promise recedes on falling wave of state asset sales

The fiscal relationship between the Commonwealth and the states in Australia’s federal system is unsustainable in the long term. That statement has been difficult to deny ever since the 1940s, when Canberra…

The NSW Baird government is relying on asset sales to fund infrastructure, but all state governments have a revenue problem. AAP/Dan Himbrechts

The fiscal relationship between the Commonwealth and the states in Australia’s federal system is unsustainable in the long term. That statement has been difficult to deny ever since the 1940s, when Canberra took over income tax from the states in order to pay for the war, and then refused to hand it back.

Since then all the states have muddled on, year after year, without effective control over their finances, and depending on the generosity of the Commonwealth in order to survive. The latest NSW budget, handed down by the Baird government so soon after the Abbott version, is just one illustration.

In principle the states have a revenue problem. Money comes in from a share of the GST, from extra grants for specific purposes from Canberra, and from various taxes and charges such as land taxes, stamp duty, car registration and public transport charges. Most states can keep things ticking over with this regime by constantly looking to trim expenditure and cut services. However, anything that needs a large chunk of capital, such as new infrastructure, needs the help of Canberra.

More significantly, the maintenance of old infrastructure, such as the existing railway system, or modernising old hospitals and schools, needs constant injections of capital, but tends to be a low priority for governments at both levels.

That is just postponing a problem till the crisis hits. The Abbott federal budget signalled the states will need to become more self reliant. Quite simply, they can’t. Well, at least not without the loss of services that citizens have come to expect – and vote for.

Selling the family silver

Where to get more capital? Of course the states can always borrow, but, although our levels of government debt are low by international standards, they are high enough to cause some anxiety about servicing the interest payments, and besides, any borrowing needs the permission of the Loans Council where the voice of the Commonwealth is very strong.

In recent years state governments have been attracted to Public-Private Partnerships (PPPs) where they invite private enterprise to, for example, to put in the capital to build new roads or tunnels, and collect tolls from users.

Unfortunately, this means that governments lose control of the projects, and there have been a number of unfortunate PPP failures, prompting caution. Another recent solution at all levels has been to sell off government-owned enterprises to private enterprise. This promises an instant sugar hit of capital that can be used to pay for high ticket budget items.

The Baird government wants to sell off the remaining electricity power generation resources to pay for significant infrastructure spending. However, this means foregoing the income from those enterprises in the future, so is eroding the revenue base in the long term.

One advantage that is often suggested is that private enterprise operates in a competitive environment, so there is likely to be some advantage to consumers in lower prices. Maybe, but we are nearing the time when the only resources left to sell off will be public schools and hospitals. Who would want to buy them? And if someone did buy them, consumers will pay more for their services.

The receding promise of “new federalism”

Most Commonwealth governments over the last half century have come to office with some promise of a “new federalism”. This has usually meant that states will be encouraged to give up some competencies in exchange for greater security in those that remain.

Robert Menzies took over the costs of university systems with the general agreement of the states; Tony Abbott wants to get rid of that burden, which is now completely beyond the power of the states. The Whitlam government introduced a comprehensive system of medical and hospital insurance, which successive governments have eroded, even though the states do not want to take up the slack.

The John Howard government wanted the states to abandon their power over industrial relations, while it introduced the GST, promising that a fair share would be returned to the states. The Rudd-Gillard governments tried to reinvigorate education funding with the Gonski education reforms, while the Abbott government wants to hand any such programs back to the states.

There are suggestions that Abbott will accommodate an increase in the rate of the GST, but only if the states will take the “blame” for it. As long as any “new federalism” is merely part of the short term policy of the incumbent Canberra government (of whatever colour) there is no future for this way of proceeding. Buck passing remains the dominant paradigm. Responsible government? Contemporary federalism means that governments at all levels are fundamentally irresponsible.

Reviving a healthy relationship

What can be done to revive a healthy federal relationship? Some people would like to abolish the States, but, as attractive as that idea may be in some respects, it is not going to happen short of a revolution. This is not a battle between Labor and the Coalition; any government in Canberra is reluctant to give further autonomy to the states and territories.

At some stage state premiers and treasurers are going to have to put aside party allegiances and differences to demand that Canberra recognise the problem and provide long term guarantees about which level of government has responsibility (and the money) for what. After all, that is no more than their predecessors in the 1890s thought that they were doing when they were writing the Australian Constitution.