Stone the crows! We are all (sort-of) federalists now.

Just about everybody except The Australian and Financial Review are upset by the budget.[i] Particularly premiers outraged with the way the Abbott Government announced it would cut $80bn in federal funding, leaving them to fund health and education increases from their own resources.[ii]

However, the Crows wonder whether this is more theatrics than threat given the states do not have the tax base to do it, raising barely half of the revenue they need.[iii] Which is why there is a flashing neon sign stating “higher and broader based GST this way” in which direction the premiers will reluctantly move, thus giving the Abbott Government a broader tax base to fund the states, supported by the premiers and without all the trouble of an election on the issue.

This morning, the Prime Minister said he had no plans to raise the GST and he would wait to read the federation white paper. In the immortal words of Mandy Rice-Davis, he would say that wouldn’t he? But, given the condition of state finances, if Canberra kicks in less then the states either need an income tax of their own or more money from the GST. And, of the two premier poisoning pills, the latter is surely less fatal.

What the Crows want to know, is what the Commissioners of Audit slipped in the Prime Minister’s tea for him to help the states, but how come it wore off so fast.

When he wrote Battlelines, Tony Abbott was of the view that state governments would not organise a policy on priapism during a COAG consultation on federalist fornication:

Commonwealth-state summits generate headlines about agreements in principle, which rarely materialise because the states demand too high a price, don’t want their officials to agree on the detail or don’t treat harmonisation legislation as a high parliamentary priority. In this way, the pursuit of national reforms becomes a frustrating political merry-go-round always needing just one more meeting, or just another funding agreement to finalise. [iv]

But now the Prime Minister wants the states to stand up in areas they are supposed to have policy and administrative responsibility for but in reality now don’t. This new devotion to devolution is straight from the Commission of Audit playbook.

The Commission argues for subsidiarity, the idea that “policy and service delivery is as far as is practicable delivered by the level of government closest to the people receiving those services.”[v]

Thus it calls for the states to make the running on hospitals with the Commonwealth’s hospital funding capped at 45 per cent. Canberra would release more money and reduce its reporting requirements.

The same applies to schools;

The states have much greater day-to-day influence over schooling policy, particularly given they control teacher wages and conditions, hiring and firing decisions and principal autonomy.
Overlapping and duplicative responsibilities and arrangements between the Commonwealth and the states result in significant reporting and compliance burdens for them in what is essentially their area of constitutional responsibility. The Commonwealth’s responsibility for non-government schools adds to this administrative cost. A simpler arrangement is proposed, whereby the states fund all schools, including the non-government sector.[vi]

The Commission’s focus is on funding the reforms. It argues that the states should take a nationally agreed share of income tax up front instead of receiving what Canberra deigns to deliver in specific purpose payments. And they should be able to vary the state component of income tax, on the principle of competitive federalism

This is where all the signals about a higher, wider GST differ from what the Commission calls for: “To the extent that these options do not promote greater competitive federalism, they are not supported.” [vii]

However, the Crows suspect Tony Abbott and his ministers only drank enough of the federalist cool-aid to consider a GST not a state income tax.

But, whatever the source of funds, empowering the states with functions and the money to pay for them assumes subsidiarity is always appropriate, that “competitive federalism” makes for an efficient use of resources and that the states are competent to undertake their functions.

None of which convinces the Crows.

For a start, the states do not apply the subsidiarity ideal, running their own centralised systems distant from community needs. The power of a remote Treasury over just about everything in NSW is an enduring theme of Frank Sartor’s memoir.[viii] And the state bureaucracies are not always close to the communities they are supposed to serve. There are 774,000 students in NSW public schools.[ix] This puts them ahead of Los Angeles, the second largest US public system with 662,000, but a fraction of NSW’s geographic size.[x]

As Brian Head points out, the states have never showered resources on local government, the service provider closest to consumers for many basic functions. [xi]
At Federation, distance meant that the states could run their own shows without upsetting anybody else. Now, not so much. The laws of physics, the competencies of plumbing do not change at the Murray, so a national approach on school syllabi and trade registration makes sense. The same goes for everything from consumer law to truck safety. According to the Productivity Commission, reducing the regulatory burden on businesses operating across state lines could add $6bn a year to the economy.[xii]

But securing anything that requires all the states to sign up isn’t easy. Craig Emerson spent his years exiled in the junior ministry by Kevin Rudd working to create a seamless national economy, “by removing unnecessary state business regulation and streamlining unwarranted differences among the states in their regulatory systems.” [xiii]

Emerson was substantially successful in areas where the states did not have much at stake. But provincial ministers and mandarins are never going to happily surrender power over their patch in the national interest. This is why we still lack a national occupational health and safety system.[xiv]

It is all very well to argue that competition between the states will lift those with the best systems, but it ignores the obvious – that state bureaucracies generally focus on their own authority rather than the amorphous measure that is national productivity.

And competition between the states is not always in the national interest. When the Bjelke Petersen government abolished inheritance taxes in 1977 the other states, and ultimately the Commonwealth, felt bound by competition to follow – thus denying Australia with a rational tax which did not harm those who paid it, what with their being dead.[xv]

Competitive federalism also assumes that the state systems are efficient. The states are better at running big consumer programs than the feds – the pink batts shambles shows that outside the welfare payments system Canberra does not have much contact with ordinary people and small business. [xvi] But this does not mean centralising state systems are all that effective, especially in key service areas where they are held hostage by the public sector unions in hospitals, schools and policing. Nothing will break a reforming minister’s will faster than the threat of teachers, nurses, or coppers threatening to strike.

As Kerry Schott observed in her review of the NSW public service, “While on the surface, processes and systems look functional, in practice they are often only observed on paper and their intention is ignored. … It is astounding to note the problems that management has faced and a credit to the public sector as a whole that service delivery has continued.[xvii]

Because of all this, the Crows will get half of what the Commission wants, the states will have more money to spend on their own services via the GST, but no share of incoming taxing power.

Just as state governments hate surrendering power, federal governments do not let go of the public purse.

Speeches drafted, cases made, opeds ghosted. Call me, 0417469093



[i] “Hockey’s two-term plan to end the age of entitlement, The Australian, May 14, “A modest but purposeful start,” Australian Financial Review, May 13
[ii] Rosie Lewis, “Canberra must see to its waste: states,” The Australian May 18
[iii] Australian Government, Australia’s future tax system, “10.6 Architecture of Australia’s tax and transfer system,” December 2009 @ recovered on May 18
[iv] Tony Abbott, Battlelines (Melbourne, 2009) 121
[v] Commission of Audit, Towards responsible government: The report of the National Commission of Audit, Phase One Report, Recommendation 7, February 28 @ recovered on May 18, @
[vi] CoA, op cit 7.7 “Schools funding,”
[vii] CoA, op cit 6.2 “Addressing vertical fiscal imbalance”
[viii] Frank Sartor, The fog on the hill: How NSW Labor lost its way, (Melbourne, 2011)
[ix] NSW Government, “NSW public school February census data,” February 2011 @ recovered on May 18
[x] American School and University, “Enrollment in largest US school districts,” 2013 @ recovered on May 18
[xi] Brian Head, “Taking subsidiarity seriously: what role for the states,” (in) A J Brown and J A Bellamy (eds) Federalism and regionalism in Australia: New approaches, new institutions (Canberra, 2007) @ recovered on May 18
[xii] Productivity Commission, Impacts of COAG reforms: business regulation and VET, May 15 2102 @ recovered on May 18
[xiii] Craig Emerson, “Markets, trade and human progress: address to the Centre for Independent Studies, March 10 2011, @ recovered on May 18
[xiv] David Crowe, “COAG ‘fails to deliver on reforms’ ” The Australian November 6 2013
[xv] Julie Novak, “Queensland, the low tax state: the birth and death of an idea and how to bring it back to life,” Institute of Public Affairs, June 2011, @ recovered on May 18
[xvi] “Pink batts debacle teaches government costly lessons,” The Australian, October 18 2010
[xvii] NSW Commission of Audit, Interim Report January 24 2012, 141, 76 @ recovered on May 18