Rebalancing government in Australia to save our federation

Today’s state and territory leaders have an opportunity to emulate the founders of the federation and make history by breathing new life into Australia’s system of government. AAP/Lukas Coch

Federation in 1901 is now the middle point between 2014 and the arrival of the First Fleet in 1788. Despite this, most views of federation, if Australians have one at all, are probably shaped by its 19th-century imagery – dusty, whiskery elderly men in overly formal dress – rather than its 20th-century outcomes.

This is a shame. Behind the federation process in the 19th century was the political courage to undertake radical reform in pursuit of the opportunities created by new political and economic structures, as well as broader strategic concerns about Australia’s place in the world.

Despite being conceived in the 19th century, federation was a child of the 20th century. In a new report released today by the Committee for Economic Development of Australia (CEDA), I argue our challenge is to think of the next stage in its development and the opportunities that a new wave of reforms could create.

The historic benefits of reform

Federation has delivered enormous economic benefits. In an insightful analysis, professors Anne Twomey and Glenn Withers usefully summarised the benefits as the “six Cs”:

  1. Checks on power: an effective federation protects the individual from an overly powerful government and ensures greater scrutiny of government action.

  2. Choice in voting options: this ranges from the time-honoured tradition of people voting for one party at the national level and another at the state level to the choice to move between states.

  3. Customisation of policies: federations allow policy customisation to meet the needs of people and communities across a large and increasingly diverse nation.

  4. Co-operation: a joint approach to reform is encouraged. This means that proposals tend to be more measured and better scrutinised, which ultimately gives reform proposals greater legitimacy and potential for bipartisan support.

  5. Competition: federations create incentives between states and territories to improve performance, increase efficiency and prevent complacency. Withers and Twomey showed that despite having an extra layer of government, federations have proportionately fewer public servants and lower public spending than unitary states. The total workforce employed in the entire public sector has declined over 30 years from 25% per cent to 16%.

  6. Creativity: successful innovations in one state can be picked up by other states and policy failures avoided. For example, casemix funding, which has revolutionised the funding of hospitals, began in Victoria in the early 1990s and gradually extended to almost every other state and to the Commonwealth. In 2011, the savings were estimated at A$4 billion a year for an estimated annual expenditure of about $10 million in maintaining the casemix system.

To that list, you could also add Withers and Twomey’s assessments that:

  1. Federalism increased Australia’s prosperity by $4507 per head in 2006 dollars. This amount could be almost doubled if Australia’s federal system was more financially decentralised.

  2. Countries with federal systems have tended to outperform unitary states over the last 50 years, even allowing for the intrinsic difficulties of comparison.

It bears reiterating that the cost of government, measured as a share of gross domestic product (GDP), is lower in Australia than in almost all comparable countries. It is reasonable to suppose that federation is at least partially responsible for successive Australian governments being able to offer relatively high levels of services to citizens at an internationally competitive cost.

Significantly, this cost is lower than in many unitary states, including the United Kingdom and New Zealand, giving the lie to the idea that state-level government is an intrinsic drag on an economy.

The current state of progress

My proposals are not based on the failure of Australia’s Federation. On the contrary, they are based on the opportunities that a new practice of government, within current political structures, could create.

In my career, I have seen this new practice of government emerge in both theory and practice.

One of the most striking aspects of the major economic and public sector reforms of the 1980s and 1990s was the degree to which they were driven through federation processes. Under Liberal and Labor premiers, Victoria advocated for, and helped drive, successive waves of the National Reform Agenda (NRA). The NRA established broad, measurable, strategic outcomes for state governments.

This was the basis for massively simplifying specific purpose payments from Commonwealth governments. These dropped from more than 90 to just six, with states having responsibility and a financial incentive for improving their performance. Australia owes Victorian premiers Jeff Kennett and Steve Bracks and NSW premier Nick Greiner a great debt for their work in pushing the Commonwealth into adopting the NRA.

The recent decision to abolish the Council of Australian Governments Reform Council, which monitors states' progress towards NRA goals, is a very retrograde step. The states will legitimately feel that they cannot rely on the Commonwealth to keep its word.

Central to this new practice of government is the idea of subsidiarity or devolution. Central governments should perform only those tasks that cannot be more effectively performed at an intermediate or more local level.

In operation, subsidiarity suggests that we should operate systems with associated political accountability through levels of government where the expertise lies. If state governments operate schools, for example, they should have the revenue to do that, without confusing the public through multiple levels of accountability. It also suggests that in the human capital area, the Commonwealth should confine itself to high-level regulation, the payment of benefits (such as pensions) and the publication of data on performance (such as My School).

In essence, we need to shatter the illusion that the Commonwealth is the “Swiss army pocketknife” of government in Australia. The state of aged-care services is a graphic example of the dangers of believing in that illusion. Conversely, the benefits of a subsidiarity approach are increasingly clear.

As already noted, casemix funding has substantially reduced growth in the cost of hospital services. Even the most cursory glance at the United States, which uses a market approach to providing health care, shows that Australia’s outcomes are achieved at considerably lower cost and with arguably greater social equity. The vast disparity in cost in the US between the same procedures done in different hospitals is well-documented. This is hard to reconcile with the evangelical view of market efficiency advanced by some in Australia.

In education, states like Victoria have made a concerted effort to provide school councils and principals with greater autonomy. Debate continues about the exact role of increased autonomy in improving school outcomes, but a recent Victorian Competition and Efficiency Commission report found that what was crucial was the extent to which:

… local decision making can activate the known drivers of educational improvement, including the quality of teaching and leadership.

As a former director general of education, I can endorse assertion. It is also hard to believe that increased centralisation is the answer to meeting the diversity of needs of 880,000 students across 2200 schools.

Many of the reforms in Victoria were closely linked to international thinking from researchers like Osborne and Gaebler. Their work was deeply influential on the Clinton administration in the US.

Three further observations support the benefits of subsidiarity:

  1. The Productivity Commission’s Blue Book, which compares the cost of service delivery across state jurisdictions, has shown that in Victoria, where devolution has been a long-term, bipartisan objective, per capita cost of hospitals and schools has been lower than in most other states.

  2. In aiming to improve outcomes for Indigenous Australians, which is one of Australia’s greatest systemic public policy failures, the greatest opportunities lie in the devolution of decision-making and accountability to local communities. They are best-placed to plan and shape service delivery in their local area.

  3. Commonwealth departments have lost all capacity for effective interventions in large-scale service-delivery systems, such as schools and hospitals.

Opportunities to crack hardest policy nuts

It is possible to see the stars aligning to use the subsidiarity principle to crack more of the hardest public policy nuts, including the long-term funding of transport infrastructure, schools and health care.

The Grattan Institute’s recent reports on the long-term budget challenges facing all levels of government describe the increasingly unfavourable economic headwinds that the Australian economy will face. In particular, they present two unpalatable truths that are evidence of a burning platform requiring a leap towards subsidiarity.

First, though not uncontested, increases in Australian government spending are being driven above all by health spending. This stems not from an ageing population but from the fact that people are seeing doctors more often, having more tests and operations, and taking more prescription drugs.

Second, claims of a “massive infrastructure gap” are not borne out by analysis of state and territory budgets. These have spent more on infrastructure in each of the past five years than in any comparable year since the Australian Bureau of Statistics first measured infrastructure spending in the 1980s.

We now have a conservative national government that is rooted in a philosophy that has traditionally been sceptical of centralisation. New information technology systems and analysis can now give political leaders greater confidence in local-level accountability. Internal government research shows that citizens intrinsically prefer, and rate more favourably, services that are planned and delivered at the local level.

Recent High Court decisions suggest a level of judicial concern about the centralisation of government power. AAP/Lukas Coch

Recent decisions of the High Court suggest that the judicial branch of government is also increasingly sceptical of centralisation. The decision in Williams No. 116 hints that the remedies for judicial dissatisfaction with the Commonwealth using executive authority to fund programs may go beyond a simple requirement for debate in parliament. Twomey has suggested that one of the broader ramifications may be that the Commonwealth is forced to take a less “coercive” approach to negotiating with the states in areas such as education funding.

As I have noted elsewhere, it is also the case that our centralised system is becoming increasingly sclerotic. In part this is because of excessive ministerial office interference in service delivery and rapidly oscillating extremes in views about ministerial accountability.

One remedy is to be far more explicit about the division in accountability between ministers and public servants. That should include making ministerial advisers accountable in the same ways as public servants. Putting subsidiarity into practice also puts the “cookie jar” of service delivery further out of reach of advisers who often have no expertise in service delivery.

But the fundamental obstacle to change in our federation has been one of the world’s most severe cases of vertical fiscal imbalance. Since the Second World War this has been our federation’s Achilles’ heel. Among other side-effects, it has encouraged state governments to develop what might be called a “Willie Sutton” mentality in which the Commonwealth is seen as the only source of revenue.

The truth is that the states prefer to go to the Commonwealth, rather than handle the more challenging task of gaining community support for generating the revenues needed to support the services they provide. This is really a matter of choice, not constitutional necessity. As the recent Commission of Audit highlighted, it is possible to imagine alternative funding systems that would shift this mindset.

How might subsidiarity work in practice?

The following examples are predicated on subsidiarity. In implementation, they would meet our growing demands for infrastructure and services, and reinvigorate our federation for the 21st century.

Terry Moran discusses the proposals raised in this article at the CEDA launch.

First, as the Commission of Audit has suggested, the Commonwealth should walk its own talk on schools by assigning responsibility for schooling to the states and transferring an agreed share of income tax revenues to them for that purpose. This would also clean out the programmatic confetti that Commonwealth ministers have traditionally sprinkled across the education sector, to its great detriment.

There is also considerable merit in the broadly mooted proposal to increase the rate and coverage of the GST and transfer the extra revenue to the states to support growing demands on public hospitals.

Second, states should be encouraged to develop a land tax, or property charge, with a broader base of applicability but much lower rate than currently applies. Substantial portions of this new revenue stream should be hypothecated to transport improvements, particularly public transport.

Third, as the Productivity Commission cautiously suggested, state governments could extend road-use charging to existing freeways, highways and major arterial roads within cities. This revenue would be hypothecated towards building and maintaining these classes of roads and availability-based payments to PPP consortia where needed for new roads. Fuel taxes collected by the Commonwealth could augment this road funding.

The community is legitimately angry about the idea of paying more for roads, when the original intention was that fuel tax would go towards this function. Transferring most of these tax revenues to the states could be part of a historic settlement to partition government roles in transport in favour of state and local governments. It would roll back the current process of the Commonwealth second-guessing other governments.

Having each major city pay this combination of property and road charges into its own funding pool would be a substantial step towards providing the infrastructure our cities need. These cities generate an enormous percentage of national wealth but their taxes effectively disappear into consolidated revenue at the Commonwealth level.

This approach would also provide the resources and legitimacy to fill one of Australia’s most pressing gaps in governance: city-wide planning of the sort that statutory bodies like the Melbourne and Metropolitan Board of Works once provided.

Australians celebrated Federation in 1901. The challenge for today’s political leaders is to win public support for another transformational reform. AAP/State Library of NSW

Premiers can make history again

None of this would be an easy political sell. It would need leadership capable of building a comprehensive political strategy, and a realistic communication plan that would help ordinary citizens understand that strategy. It would, however, play to what should be the strength of politicians: their ability to build alliances towards strategic objectives, rather than as micro-managing CEOs.

Devolution is a strategy that, in theory at least, has the capacity to create bipartisan consensus. As the reforms of the 1980s and 1990s show, this is a prerequisite for political acceptance and avoiding rollback by subsequent governments. As former prime minister John Howard remarked recently, successful reform requires the community to accept that it is fair and in the national interest.

This would be a major change in Australia’s practice of government. It would mean, among other things, a dramatically different role for the public service at the Commonwealth level. In modern terminology it would probably even be called “disruptive” or “transformational”.

It is striking that some of the core players in this transformation would be the state premiers, the same group who were central to the process that culminated 114 years ago. What we need now is a group of premiers who are interested in “saving” the Federation that their political predecessors helped create. They would do this by being the conduit through which more power and accountability flows into the local governance structures that states and local government are best suited to build and support.

For many years, the tide of funding and authorisation has flowed towards Canberra. As economic headwinds shift, this tide is turning and business as usual will increasingly struggle to make headway.

As Shakespeare reminds us in Julius Caesar, his play about political leaders contemplating change, a tide “taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries”.

We need political leadership prepared to ride with that tide.


The CEDA report A Federation for the 21st Century will be launched by the Hon Nick Greiner AC, The Hon Justice Duncan Kerr Chev LH and Professor Terry Moran AC today in Sydney.