Transforming NSW In The Context Of Federation Reform

NSW State Treasurer, The Hon Andrew Constance, delivered his first Budget in 2014 for the new government of Premier Mike Baird. His first year as State Treasurer was marked by good news for NSW. Growth and infrastructure development are key words in this. As NSW approached the State election in March 2015, the Baird Government’s big proposals became an election challenge – the partial privatisation of the electricity network to fund a new Sydney Harbour rail crossing and rapid transport network and extensions to the $33 billion WestConnex motorway. On Wednesday 19 November 2014 Andrew Constance addressed the Sydney Institute to discuss the Baird Government’s proposed Rebuilding NSW strategy.

TRANSFORMING NSW IN THE CONTEXT OF FEDERATION REFORM

ANDREW CONSTANCE

Thank you to Gerard and Anne for having me to this Institute, one of Sydney’s great institutions. It is a pleasure to be here.

As some of you may know, I hail from the bush, Bega to be precise. But I must say, it’s a great time to be a part-time Sydney-sider. As we see the motorcades of international dignitaries swarming around our city this week following the G20 and the city humming with construction and cranes in every corner – it feels like our great city is thriving and the world is watching. And they are.

Tonight I’m going to talk about the exciting task ahead of this government: rebuilding NSW in the context of federation reform. I’ll briefly share with you this government’s vision to transform our great state but I’ll spend most of my time on why we need to grasp with both hands the historic opportunity to concurrently review the federation and tax systems in Australia.

Rebuilding NSW

The next five years will be an exciting time to be in NSW. The Baird Government will transform our state. Our $20 billion Rebuilding NSW program will see new productive infrastructure, much-needed and long overdue infrastructure, delivered by releasing the capital locked up in the State’s electricity network businesses.

Why do we need to rebuild NSW? Well at the heart of the problem is that congestion is crippling our State. People in Sydney are spending 185 hours a year stuck in traffic on the M4, M5, M1, or on roads like Victoria, Parramatta, The Spit or the Princes Highway when they could be at home with their families and friends or at work boosting our State’s productivity.

We have a unique opportunity to unleash our global city’s economic potential by delivering world class transport and motor networks. And in country NSW we must unlock our freight pinch points and build new roads, dams and water pipelines. We need to get our produce and minerals to our ports with ease and at low cost so our farmers can capitalise on our proximity to Asian markets and respond to one of the greatest challenges of the twenty-first century – food security.

If the government receives the mandate to lease 49 per cent of the poles wires at the 2015 election, we have identified the following strategic priorities for funding:

• Sydney Rapid Transit – reducing congestion across the rail network by way of a second Sydney Harbour rail crossing and the Western Extension, providing rapid transit to more commuters in the North West, Bankstown and Inner West.
• Sydney Roads Renewal – including the WestConnex and scoping work as announced in the budget in relation to the F6, Northern Beaches, and the M9.
• The Regional Roads Fund – for roads and bridges in regional areas, eliminating the need for diversions, delays and backtracking.
• The Regional Water Fund – for water security and quality in regional areas.
• Schools and Hospitals Building Fund – to deliver new educational and public healthcare facilities.
• The Sport and Cultural Infrastructure Fund – new and upgraded sporting facilities and investment in cultural infrastructure.

As we look down the barrel at the exciting future ahead of us, it’s hard to believe that when we took office three and half short years ago, on any conceivable measure our state was last. Sydney was declared full and the state had lost its mojo.

As Standard and Poors recently noted when taking us off negative outlook, the state has managed its finances incredibly well. We have reduced growth in expenditure to below that of revenue growth and we have used the flexibility of our balance sheet to begin to clear the $30 billion infrastructure backlog inherited from the past. This government had taken the necessary actions – and often hard decisions – to improve the long term sustainability of this State’s finances.

Recently, NSW officially returned to being number one under the Commsec State of the States report. Now is the time to embrace the opportunities ahead of us, and if the Baird Government is re-elected in March 2015, deliver this government’s plan to rebuild NSW. What a great time for NSW to lead the states as the nation debates the Federation and taxation white papers.

Federation reform

With an eye to the future, the Commonwealth government’s promised mature debate on Federation reform presents an enormous opportunity to transform the functions and operations of state governments.

The three most significant areas of opportunity that I think this process can address are:

1. Remove duplication across tiers of government
2. Align the incentives for good policy and tax outcomes
3. A greater focus on individual outcomes across all levels of government

Firstly, we have an opportunity through this process to remove duplication across government.

The duplication of functions between Canberra and the states places an unnecessary burden on taxpayers. There are health and education departments in Canberra that don’t run a single school or hospital.

Fortunately, the Commonwealth recognises the issue of duplication and say that their whitepaper will “consider ways to reduce and end, as far as possible, the waste, duplication and second guessing between different levels of government… [and] make interacting with government simpler for citizens”.

Through this process, we can also place under the microscope the ability of the states to deliver microeconomic reform. After all, it’s the States’ collective productivity that comprises the nation’s productivity.

This government has already started this process in the areas of Vocational Education and Training, Energy reforms and Planning.

Secondly, federation reform presents a significant opportunity to better align incentives for good policy and tax outcomes.

A sensible conversation on the Federation must also address the issue of tax, which is why I was so glad to see the Prime Minister announce he would be reviewing them both concurrently. My overriding principle when it comes to tax is that Australians should pay less tax into a fairer system.

To ultimately achieve “transformative change” we must recognise the significant challenge for the states, which, in the current system, are constrained by narrow cast and highly inefficient tax bases.

Recently, on being given the honour to serve as this State’s Treasurer, I was handed the task of bringing down a budget within six weeks. While it was a well-received budget, it highlighted the broken Federation and also demonstrated the structural deficiency and risks to the long term sustainability of state finances.

Of course, we welcomed with open arms major infrastructure spending from the Commonwealth. Projects such as Western Sydney roads around Badgerys Creek, WestConnex and the Pacific Highway featured prominently. Yet it was the decision to sever a number of National Partnerships, particularly in health, that will force the states either to find health savings, return to Canberra to plead for a new deal, or show leadership through tax and federation reform.

Later this decade, the Commonwealth starts to significantly withdraw its support from health care funding. In 2018, the Federal Government’s funding of our health system represents just short of 30 per cent. In 2050 it will fall to just above 10 per cent.

Federal financial relations in Australia are marked by a mismatch between revenue raising capacities and service provision responsibilities.

The Commonwealth Government collects around 75 per cent of combined federal and state government revenue (and around 84 per cent of combined tax revenue, including the GST) but is responsible for only about 58 per cent of total government spending, including defence and welfare payments.

The states collect around 25 per cent of all federal and state government revenue, but are responsible for around 42 per cent of combined spending, including schools, hospitals and other essential services. On this basis, Vertical Fiscal Imbalance was estimated at around $85 billion in 2012-13.

This is more than the entire state budget for NSW.

In 2014-15, the Commonwealth Government is expected to distribute around $88 billion to the states with the majority, $54 billion, in GST revenue payments. GST revenue is distributed among the states using horizontal fiscal equalisation, which rewards states who do not get their house in order.

Those with a long memory, will know that the history of revenue raising spending responsibilities of the national and state governments goes back a long way.

There’s the provision in the Constitution that provides that with the handover of customs duties to the Commonwealth as part of Federation, the States would get the excess of duties collected over the expenditure needs of the Commonwealth. The modern State Treasurers will be unsurprised to learn that it was only a handful of years before the expected excess was zero, and the States lost all income from this source.

Then there was the temporary takeover of income tax by the Commonwealth for war purposes that never came back to the States.

In our modern, technologically-advanced society, conventions must change, and the realignment of responsibilities between the tiers of government must take place.

Tax reform must be considered in a new age in which disruptive technologies will erode the nation’s tax base. With the highly centralised tax system that exists in Australia the states are left with narrowly-based and inefficient transaction taxes such as stamp duty. Not only are we at the whim of volatile property and labour markets but, likewise, we are exposed to changing technologies.

Tax reform should also recognise the current lack of alignment of incentives for States to undertake microeconomic reform.

Government is still the only body with the economic and organisational capacity to procure many services, but this doesn’t mean government doing the service provision is the best answer

NSW needs a professional government led by leaders who know what they’re doing to contribute to this important discussion on tax and federation reform.

Thirdly, I think Federation reform can help drive a far greater focus on individual outcomes. With clearer accountabilities across levels of government, it’s my view that this will drive a greater focus on individual outcomes and in some cases get governments get out of what they shouldn’t be doing in the first place.

An example of government policy focused on individual outcomes is the National Disability Insurance Scheme. This is an issue close to my heart given my former role as Minister for Disability Services.

The National Disability Insurance Scheme is a real and transformative reform, which should stand as an example that if we broaden our perspective anything is possible.

The NDIS and the agreement between the Commonwealth and the States to implement it is about more than money and which level of government runs the NDIS. The agreement provides much needed funding, this can’t be denied.

But, much more important, is that we aren’t swapping a state government service for a Commonwealth Government service. We are playing the role that only government can, which is provide the money and the organisation, but by placing the expenditure in the hands of people with disability, we are getting better outcomes. The NDIS is a human rights issue.

With the NDIS, the only question left is whether we should in the Federation White Paper process find a way for just one level of government to pay the whole bill. One view could be that shared accountability is diminished accountability, or alternatively, will people with disability feel more comfort in having both Commonwealth and state government sharing responsibility on the basis that neither can deny responsibility and both need to care about outcomes.

Government is still the only body with the economic and organisational capacity to procure many services, but this doesn’t mean government doing the service provision is the best answer.

With clearer accountabilities, we can also build better technological systems across the tiers of government that will transform the interface between community and government.

A great example of this is Service NSW, which is the NSW government’s one-stop-shop for government transactions. Service NSW takes a customer-centred approach to government services. Where people used to go to the RTA for drivers licence applications and Births, Deaths and Marriages for birth certificate applications now they can do more than 800 state government transactions in one place with Service NSW.

Since its launch in 2013, Service NSW has served more than seven million customers through their digital service, 24/7 phone service and 20 service centres across the State. And today we opened our first digital store in North Sydney.

One question I have is this: as part of the Federation reform process is it possible for Commonwealth services to be made available through the Service NSW platform?

Any conversation on federation reform and taxers must consider the impact on those whom the Government exists to serve – the people of NSW and Australia.

Conclusion

Before I wrap up, I just want to take a moment to reflect on what I think success looks like when it comes to Federation reform.

From my perspective as Treasurer, there are three key issues facing our community that I think Federation reform can help us solve for:

• Healthcare funding;
• Poor regulation across key sectors;
• Funding and incentives for infrastructure development

If, at a minimum, Federation reform can help us address these issues, then I’d call that progress.

To conclude, we are entering a new exciting era in this state. We have an ambitious infrastructure agenda, technology is advancing faster than many of us can conceive and the way we fit into the Federation is finally subject to a rigorous review.