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View from The Hill

Abbott floats GST change but puts limits on commitment to major federation reform

Tony Abbott described Australia’s federation as a ‘dog’s breakfast of divided responsibilities’. AAP/Alan Porritt

The headline out of Tony Abbott’s weekend Henry Parkes Oration on federalism was his highlighting that the federal government is willing to contemplate a more onerous GST – on certain conditions.

The more subtle message was his note of hesitancy about charging full bore ahead on trying to dramatically reform Australia’s federation.

The government has a white paper underway, and Abbott would like change. But he sounds tentative.

He knows the political cost could be high for something voters mightn’t care about too much.

He acknowledged that “the Australian people, deep down, could actually prefer the messiness and ambiguity of our current arrangements because they make it harder for governments to change what we’ve learned to live with.

"The federation we have – for all its flaws – has spawned a vibrant democracy, a strong economy, and a cohesive society”, and it “is being reformed - incrementally – all the time” through decisions and agreements its governments make.

The federation was a “dog’s breakfast of divided responsibilities” but “not entirely or even substantially dysfunctional” - just “plainly not optimal”.

To borrow one of his own phrases from another context, Abbott over the years has been something of a weather vane on federalism.

“As health minister … between 2003 and 2007, the practical experience of trying to make a coherent system from out-of-hospital Commonwealth-funded treatment, on the one hand, and largely state-funded public hospital treatment, on the other, slowly turned me from a philosophical federalist to a pragmatic nationalist.”

That was when he tried unsuccessfully to persuade John Howard that it would be a good idea for the Commonwealth to take over responsibility for the states’ hospital systems.

When he wrote his manifesto Battlelines in 2009 he was in his high centralism phase. “Back then, my thinking was that the states should become subordinate legislatures to the Commonwealth, in a parallel to the way local councils are subordinate to the state governments.

"I now doubt that any such constitutional change could succeed, and, in any event, it’s a good principle to propose the smallest change that will actually tackle the problem – that’s why resolving the mismatch between what the states are supposed to deliver and what they can afford to pay for is worth another go.

"That’s what my colleagues and I meant when we said repeatedly, before the last election, that our federation reform white paper was meant to make each level of government more ‘sovereign in its own right’”.

That sounds neat and logical in theory but, as Abbott appears to sense, it could be a painful journey to a dead end in practice.

Take health. The Commonwealth is not going to take over responsibility for the hospitals. Nor is it going to devolve responsibility for Medicare.

Labor’s attempt at better rationalisation caused friction and still left problems.

In some areas, both levels of government are going to stay involved for a combination of policy and political reasons.

Then there is the separate but related question of whether the Commonwealth and states can “better align their revenue with their spending”.

“To address ‘vertical fiscal imbalance’ we could either adjust the states’ spending responsibilities down to match their revenues, or we could adjust their revenues up,” Abbott said.

The first approach would mean the Commonwealth doing more and the states less. Alternatively, the Commonwealth could stop funding programs in areas of state responsibility, he said.

We know the government would prefer to push functions down. And here is the sharp point: “The Commonwealth would be ready to work with states on a range of tax reforms that could permanently improve the states’ tax base – including changes to the indirect tax base [meaning the GST] with compensating reductions in income tax”.

A higher and broader GST would advantage the states because they get all the GST revenue. How much better off they were in fact would depend on changes in responsibilities and other Commonwealth funding.

Abbott also said that it also should be possible to make the distribution of the GST revenue more equitable between the larger states with the smaller states no worse off, which does sound like a loaves and fishes exercise.

The Prime Minister plans to meet before mid-2015 with all premiers and chief ministers solely to discuss reform of the federation. He made a point of saying this would be after the coming state elections - occurring in Victoria this year, and in NSW and Queensland next year.

By then the federal election will be only a little over a year away. Abbott asked rhetorically: “Might the states be prepared to accept responsibility for broadening the tax base?” But it would be the federal government, which levies the tax, that would carry the burden of putting to the people a plan for a higher or broader (or both) GST. Abbott has pledged any proposal for tax changes would be taken to the voters, rather than being brought in before the election.

Yes, there would be offsetting income tax cuts, and compensation for low income earner not in the tax system, and Abbott says the government is determined to avoid any increase in the overall burden of tax.

And yes, given all the problems in the current revenue base, the GST should be changed.

But a government needs plenty of political capital to do anything that means people would pay more GST. Would it have a lot more such capital by 2016? Would people have greater trust in Abbott and Treasurer Joe Hockey than they currently do?

By its deep budget cuts in the longer term estimates of funds to the states for health and education, the federal government has put maximum pressure on the states to play ball on tax changes.

But Abbott is giving himself an out before the serious work begins.

“We’re not going to have a pointless fight sponsoring change that the states aren’t even prepared to consider – because, if it’s to happen, reform of the federation has to be owned by the states as well as by the Commonwealth,” he said.

“The fundamental test that all parties and all levels of government will face over the next year … is this: are we prepared to have a rational discussion about who does what, or do we think that the current arrangements, perhaps with some adjustments at the edges, are the best that can be managed under the circumstances?”

Abbott has over the years done a full circle on federalism, although he uses the description “pragmatic nationalist” to describe his position now as well as when he was a centralist. At the weekend the pragmatism seemed much on display.

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