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The world of someone with an 18 year background in banking, and currently the Shadow Minister for Finance in the State Opposition, tends to lend itself to viewing all problems through the lense of numbers. So as boring as that feels, and in the strong comfort that my wife still finds me interesting I want to outline a few numerical propositions as it relates to our challenge of a federation model that has outgrown its use by date.
Australia - A Country Out of Alignment
A quick synopsis of total Government revenue (all levels) and expenditure shows an imbalance that I believe is at the core of the problem. In approx percentage terms the Commonwealth receives 80% of revenue, and accounts for 56% of expenditure, yet the State Government receives only 16% of the revenue, and accounts for 40% of the expenditure.
The simple problem that this creates is an absence of both strategic and tactical accountability. For the Federal Government it’s "too easy", there is no need for expense control and grand election/spending programmes can be made with limited requirement for pain or necessarily long term economic benefits ensured. For the State Government it’s "too hard" – it will never earn enough so it always has its cap out; it gets away with an “it’s not my fault” syndrome. For Local Government, they must simply be satisfied with the "crumbs off the table".
This theme is picked up by Robert Carling in his research piece for the Centre for Independent Studies “State Tax Reform: Progress and Prospects”. He quotes V . W. Fitzgerald who says amongst other principles for federal tax assignment that ‘each level of government should be responsible for raising taxes covering a substantial proportion of what it spends, on the grounds of basic democratic accountability’.
He goes on further to note that whilst every federation in the world fails to achieve complete fiscal autonomy for its sub-national governments, it does not negate the principle that each level of government should self-finance a substantial proportion of its expenditure, and should have the fiscal instruments at its disposal to make choices about the size and structure of its revenue and expenditure.
This imbalance is only going to get worse and the well articulated fiscal gap would expedite this in coming years. In simple terms just looking at health and the associated problems of an ageing population the total budget of $13.2 billion in 2008-09 is already two-thirds of total State tax receipts of $18 billion. It is the State’s biggest requirement and that will only increase. Health is growing at 7-8% whereas revenue is only increasing by 3%. This means that in the medium term health will consume the State Budget. In other words the State Budget will have almost no relation to the services it is required to produce.
Reform is badly needed. Aligning revenue and expenditure will enhance accountability and ultimately service delivery. In a form of rich irony – a $20 billion surplus is bad for the country. It shows a system that is not working when huge levels of state infrastructure remain untouched.
So what do we do?
A Re-definition of Responsibilities Required
It must start with a re-consideration of overall responsibilities.
The vexed question of increasing or decreasing the responsibilities of various levels of government must be addressed. It is no shame to improve the service delivery to your community by either reducing or removing your job. I say that with a straight face and personal interests must be removed from this debate.
If we pick two key areas in this debate being education and health it doesn’t take long to see a maze of confused responsibilities and service delivery.
The Federal Government’s current health responsibilities include the Pharmaceutical Benefits Scheme and Medicare, aged care, regulating therapeutic goods and supporting GPs. Whereas the State Government is responsible for our hospitals and nurses. Does it make sense to consider the allocation of responsibility to a single level of government to create end-to-end health care? Absolutely.
Education is a similar story. The Federal Government funds universities but also funds public/private schools through grants distributed directly and via State Government, and now technical colleges or TAFEs in any other words. The State Government manages schools, employs teachers, coordinates the curriculum BUT it’s hard to know who is responsible for what. Does it make sense to have a national curriculum with a single line of responsibility for education of child from womb to workforce? Absolutely.
A Re-worked State Budget
As an exercise of interest and leaning on financial simplicity, there is an interesting out come if you re-align health and education to a federal government. I should caveat that I am not proposing this at this point but, the financial outcomes provide a very interesting point.
If you take out all health and education expenses for 2008-09 and Commonwealth Grant Revenue (ie GST and specific Commonwealth grants) you could balance the State Budget.
It would leave a State Budget with expenses of $23.6 billion and importantly revenue that it controls (ie taxes, fines, sales, investment income) of $26.8 billion.
In other words a State Surplus of $3.2 billion that could be reduced to around $1 billion with an aggressive infrastructure investment program.
The important element here is that States could manage their own destiny together with a more strategic approach to end-to-end service delivery at both a Federal and State Government level.
Problem of Tax In-efficiency
Before we take the easy pill or start taking credit for solving the big problem facing the nation... the issue of tax inefficiency and indeed the many stakeholder concerns would need to be addressed.
In relation to taxation it is well documented that many state taxes are materially inefficient (insurance levies, transaction based duty et al) and the Federal Government benefits, according to Robert Carling ‘from the superior economic and administrative efficiency of centralisation’. Still tax efficiency could be considered in light of responsibility reform, not before.
In May the NSW Coalition held a tax forum, which found that businesses are burdened with need to comply with multiple levels of taxation. There are 56 separate taxes that apply to businesses in this country – more than double the number in the UK, which has an economy three times the size of ours.
Businesses operating across States are bearing additional costs because of inconsistent tax rates and methods of collection. There is also a real need for budget reporting and communication needs to be transparent – currently State Governments change the accounting methodology and reporting standards they use at their whim.
The key point is that responsibility reform must be concurrently matched with taxation reform.
Conclusion
The $20 billion surplus has the danger of entrenching a system that isn't working. The conga line of "nation building needs" may well mask the many problems of federation.
Internet campaigns and newspaper ads etc will tell us what our State Government is doing to get some of the golden egg... Here is a suggestion, fix the system and the golden egg will end up in our local communities not hidden under Parliament House in Canberra.
In the interim each Government must take responsibility for what it currently manages and... All will be judged by what they do with what they have rather than blaming a system for their own mismanagement. This is a principle that the community is also demanding is undertaken before during and after this debate.
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