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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.

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34 Comments sorted by

  1. Mike Swinbourne

    logged in via Facebook

    Maybe its just me, but I have ever understood how our governments supposedly improve their financial positions by selling of profitable enterprises.

    Would someone explain it please?

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    1. R. Ambrose Raven

      none

      In reply to Mike Swinbourne

      No, no, it is quite simple.

      Once in private hands, costs and charges can and will be steadily increased, maintenance cut to a minimum, and infrastructure run down until it collapses (as with Telstra's copper). Naturally CEO pay is tripled or quadrupled to face the long liquid lunches required in the provate sector (as we all expected to happen - Medibank's CEO included - if Medibank is flogged off).

      Obviously not even the conservative voter will affect that destruction of their future, so we get these steady waves of snake oil (from which Big Media profits), with colourful brochures offering to sell us what we already own. We are assured that these thiongs will be cheaper and more efficient. Pity about the power failures, power poles collapsing, algae in the water, failing phone lines, deteriorating roads, and supposedly public hospitals run by St John of God that refuse to offer abortions (the Catholic Church is well-supplied with knitting-needles, and prayer).

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    2. Garry Baker

      researcher

      In reply to R. Ambrose Raven

      Naturally CEO pay is tripled or quadrupled to face the long liquid lunches """

      Yes, like the CEO of Australia Post (a public untility) .. he's paid $4.8m per year, yet his fringe benefits really put an added shine on the pay rate.....Fringe benefits, and all

      Privatise AP and it doubles our troubles ... ie: So you want to post a letter Eh ! ... well feed your $10 note into the machine then attach the sticker it spits out

      http://www.heraldsun.com.au/news/australia-post-donates-boss-ahmed-fahours-2m-bonus-to-islamic-museum-of-australia/story-fni0fiyv-1226958003540#itm=newscomau|home|nca-homepage-network-most-popular-masthead|1|australia-posts-2m-gift-to-islam-museum|homepage|homepage&itmt=1403086339910

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    3. Margret Schuller

      logged in via email @bigpond.net.au

      In reply to Mike Swinbourne

      Short gain politics based on short term election cycle.
      It is all about reelection and has nothing to do with what is best for the country in the long term

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  2. Susan Nolan

    retired

    Perhaps taking away income taxing powers from the commonwealth and giving it back to the states might be the way to go.

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    1. Bill Woerlee

      logged in via Facebook

      In reply to Susan Nolan

      Income Tax was collected by the states until 1949 when the state officials were transferred to Commonwealth control. The states were happy to get rid of this onerous tax and through its unpopularity onto the Commonwealth, similarly to the GST. Frazer passed legislation that allowed the states to impose their own income tax over and above the commonwealth rate which would be collected by the ATO. Not one state put its hand up over the 15 year period that this legislation existed. Keating finally ended this hollow shell by repealing the act. The states have made it clear that they do not want these sweeping taxing powers, just their fruits.

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    2. Susan Nolan

      retired

      In reply to Bill Woerlee

      Yes, Bill.

      But maybe the people - rather than the politicians - would wish to see income taxes raised by that level of government (the states) which has the responsibility of running health, education, justice, etc.

      It would help to do away with the blame-shifting; and it would also help to deter (what's that other clumsy word? "dis-incentivise") Commonwealth pollies from interfering in state government responsibilities just because they think they are areas which the people care more about. We know that referenda trying to shift more power from the state to the Commonwealth tend to fail and that, therefore, the pollies get together to transfer such powers WITHOUT going to referenda.

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    3. Bill Woerlee

      logged in via Facebook

      In reply to Susan Nolan

      Actually, this split is an excellent outcome for all the politicians. For the feds, it means they can grandstand and pontificate about the profligacy of the states and blame the state pollies for any failings while their state counterparts can blame the feds for being stingy with "THEIR" money. There is no smoking gun of accountability so it is a win-win solution. People can blab on about it, fulminate and the like but when it comes down to dust, it is such a convenient excuse that it is in no ones interest to change the binary.

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  3. Giles Pickford
    Giles Pickford is a Friend of The Conversation.

    Retired, Wollongong

    I wonder if we could align the Commonwealth and the States and Territories to all have their elections at the same time? The silly games they all play would be over.

    It could be done by administrative fiat. We wouldn't need a referendum.

    I would only have to fill in two ballot papers instead of one.

    The thing is that it would force our eight governments to put all their cards on the table at the same time. Surely this would bring about a bit of cooperation.

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    1. Susan Nolan

      retired

      In reply to Giles Pickford

      Hi Glen,

      You'd have to fill in four ballot papers - 2 for the Commonwealth and 2 for the State.

      In any case, we see in Victoria at the moment one of the problems of having fixed-term parliaments.

      You'd still have those electors who believe that one way of implementing checks and balances is to vote one way in the Reps and another way in the Senate; as well as voting one way at the commonwealth level and a different way at the state level.

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  4. Garry Baker

    researcher

    As for the LNP pushing their ideas to outsource most things. Perhaps we the voters could dwell on the thought that politicians need to be outsourced as well...Given that Australia is in desperate need of better managers.

    The sad lot we have running the place at the moment advocate selling every asset Australia has - Clear the decks for free enterprise to do it cheaper and better, as they claim. However they make no mention of the fact that most of Australia's vital assets have already been sold…

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    1. Susan Nolan

      retired

      In reply to Garry Baker

      Thanks for the information in that link, Garry.

      I've always found it odd that our LNP pollies (and others) push the line that government should not be involved in running X, Y or Z just before they sell off (either completely or partially) X, Y and Z to some foreign government/SOE.

      I can't see why - philosophically, economically, logically, rationally - if it's ok for a foreign government to be running X, Y and Z - why it's not ok for our own government to be running X, Y and Z.

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  5. R. Ambrose Raven

    none

    Plunder-As-Usual is no longer possible, as the absurdity of flogging-off to fund infrastructure is showing. Thirty years of inflating a debt-driven housing price bubble fed by running down infrastructure has transferred immense riches to the obscenely wealthy, but only now are we being forced to face the costs of climate change, resource depletion, severely stressed infrastructure, a late limits-to-growth world, and an fragile society.

    Abbott et al are doing us one favour – their dreadful refugee…

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    1. Garry Baker

      researcher

      In reply to R. Ambrose Raven

      Company tax should be increased to personal tax levels,"""

      Not for the bulk of multi nationals - The Canberra crowd find it too hard get taxes from them - Like 1c tax for every $1000 profit they offshore

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    2. R. Ambrose Raven

      none

      In reply to Garry Baker

      Ah yes, that reminds me.

      Note the deafening silence on a super-profits tax for the banksters.

      Financial deregulation has inflicted the world's most expensive banking system on Australians. Skyrocketing transaction fees, the compulsory superannuation gravy train and a near quadrupling of residential mortgages to almost $1 trillion have caused the Big 4 to soar from a combined market capitalisation of below $30 billion in 1992 to almost $300 billion today, virtually untouched by the global financial…

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  6. Ray Butler

    logged in via Facebook

    Basically two things we have to ensure; 1) Academics are developing rational direction, for humanity across the board, untainted by outside influences, and 2) wealth serves those findings, the finding are not adapted to serve wealth. I can tell you how to do it but Murdoch taught me that things are more likely to get done if people think they came up with the idea themselves. So here goes, but afterwards just pretend you thought it up;

    I'm a big fan of Democracy, Capitalism and the Republic style…

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    1. Susan Nolan

      retired

      In reply to Ray Butler

      Hi Ray,

      By no stretch of anyone's imagination could the "academic republic" which you propose be described as democratic.

      It more closely resembles an oligarchy.

      Besides, academia is far too narrow a sector of the community for it to be likely that they would run the country well or with much notion of what the public good would mean to the majority of the population.

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    2. Bill Woerlee

      logged in via Facebook

      In reply to Ray Butler

      Ray, they tried this is Russia and it was a total flop. They gave it 70 years, slaughtered tens of millions to fit the frame and still couldn't make it work. Similarly on a modest scale, they tried it in Italy with Mario Monti and that too was a dead loss. Trouble with academics is that they believe their own propaganda without understanding that Universities are just sheltered workshops for the socially inept. Similarly, politics is the glamour game for ugly people. Unlike academics who actually believe that a PhD in snail sweat gives them a qualification to determine the fate of a single parent, politicians know that their psychopathic need for cameras and approval is dependent upon cosying up to the single parents. That why politicians work in the community and academics are total failures.

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    3. Ray Butler

      logged in via Facebook

      In reply to Susan Nolan

      It depends on how narrow you make it; potentially anyone can contribute to the formulation of valid options, not just people with degrees. You for example may point out something that carries issue in practicality, like you just did with my suggestion, and it would be taken into consideration.

      The idea that I am trying to establish a government on the academic elite is not exactly true, it is based on academia and anyone is capable of understanding an issue, they do not have to be a Professor to make a rational argument, but also peer review works on the idea that the flaws of individuals are largely eliminated.

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    4. Ray Butler

      logged in via Facebook

      In reply to Bill Woerlee

      There is a difference between academics and academia; potentially anyone is capable of formulating a rational argument, you do not need a degree to have common sense. So I do not know of these example you provide but they sound like Technocracy, my idea is more like Democracy where any citizen can contribute to the formulation of options, they just have to stand up to academic processes like peer review.

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    5. Bill Woerlee

      logged in via Facebook

      In reply to Ray Butler

      Ray, thanks for your comment. By broadening your concept we now have a concept which is ... well ... just like we have now where parliament, the courts and the party system assisted by the press put ideas in the crucible of logic, debate and argument before they are accepted as policy. Good old Australian democracy - alive and well.

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  7. Graham Storrs

    logged in via Twitter

    Getting rid of the States is the obvious answer. It is absurd that with a population about the size of a single mega-city, Australia needs three levels of government. Removing the State governments would remove a huge amount of complexity and a huge chunk of expense. It would replace buck-passing with clear responsibility.

    If this really would require a revolution (as opposed to a vote on the constitution) then I say bring it on.

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    1. Susan Nolan

      retired

      In reply to Graham Storrs

      I know that some people see this as an article of faith - it certainly was in the ALP along with the abolition of upper houses and the socialisation of the means of production and distribution.

      I don't support any of that triumvirate. In fact, I think that the abolition of the states and the transferring of all state powers and responsibilities to the Commonwealth is absurd and a recipe for disaster.

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    2. Michael Shand

      Software Tester

      In reply to Graham Storrs

      I'm not sure that the Levels of government have very much to do with population although it certainly plays a part

      In 1900 the population was about 4 million, if we did it by population then our government should have 4 times as many layers than it did in 1900 which doesn't make sense

      Conversly, Greenland had a population of 13,000

      13,000 X 307 = 3,991,000, should our government be 307 times bigger than greenlands? 307 times more MP's?

      I think there are better ways to measure how many levels of government we should have

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  8. Michael Shand

    Software Tester

    The problem is the number of unproductive projects that both federal and state governments invest in

    They gave $250 Million on school chaplins, they spend $700 million a year on inprisoning a hundred poor brown people in our own version of Gitmo

    They fund new freewawys left right and centre but refuse to invest in public transport

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    1. Graham Storrs

      logged in via Twitter

      In reply to Susan Nolan

      The religious zealots of the Abbott government (not least, the Mad Monk himself) plan to find ways around the recent High Court decision. The most likely work-around is that they will give "tied grants" to the States to implement the chaplaincy program.

      It's too soon to celebrate. As for CSIRO, scientist only dream up "theories" don't they? Like gravitation and evolution and that "crap" one... What was that? Oh yes, global warming. No religious zealot in his right mind (and with all that coal money at stake) is going to support the CSIRO, is he now?

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  9. Philip Howell

    Solicitor

    It find it exasperating that discussions like this proceed on the basis that the States have an insufficient revenue base, and are helpless without Commonwealth assistance.

    In fact, the States have always had an adequate revenue base. They just refuse to use it, preferring instead to blame the Commonwealth for their own deficiencies.

    All States are able to levy land value taxation.

    Land value taxation is a tax on land ownership which would require each land owner to pay to the government a percentage…

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    1. Chris Saunders

      retired

      In reply to Philip Howell

      So this idea Philip of a state land tax, would it be an extra tax on top of council rates?
      In regard to your number one point, if after purchasing land there are no new apparent social improvements, in other words the pre-existing local shopping centre, roads and railway station are not changed even after thirty years and yet the value of the land has increased seemingly purely because of increased demand through population increase, is the the land owner then obliged to pay tax according to this new land value, even though ostensibly the increased value of the land to the occupying owner has no immediate obvious benefit but would only be realised if sold?

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    2. Philip Howell

      Solicitor

      In reply to Chris Saunders

      Yes Chris, it would certainly be an extra on top of council rates. Whether or not it leads to higher taxes overall is a matter of choice. It could replace payroll tax or some (or all) stamp duties. Or it could be an additional tax if higher government expenditure was the aim.

      The point is the States are not powerless. They have a source of revenue.

      The land owner would be liable to tax each year on the land value as at that year; so as value increases, the tax increases. It would be comparatively…

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    3. Chris Saunders

      retired

      In reply to Philip Howell

      I certainly take your point that the states are not powerless to tax, but I fail to understand the benefit in taxing the ordinary person's land or the ordinary farmer's land any more than they currently are. If they are making capital gains as for instance buying and selling on these properties there is a a capital gains tax already applied.
      It is my understanding that it is the rentier class who take the rents from land that it was considered by economists like Ricardo should be taxed. And this…

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  10. Alan Herath

    Retired

    Yes sorting of overlapping responsibilities is the first step to cut out the opposing armies of Commonwealth and State public sector employees along with multitudinous advisory panels, each trying to dominate or second guess the other in the endeavor to keep the power.
    And when we observe the four levels of government, namely Comm., State, Local, and Regional Development/Tourism and other Boards it is my experience that decision making is so diffused such that many people spend most of there time in search of the ultimate decision maker instead of delivering action. And in many cases decisions don't get made until we go round the circle again and do another investigation and report to add to the stack already on the shelf

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