Following the High Court decision in Pape, the debate that will follow release of the Henry Review is probably the right time to realign who does what within the Australian federation, and then determine how those functions should be funded.
This is because, as Henry Ergas recently observed in the Australian, the reality of vertical fiscal imbalance within the Australian federation means that to use the famous phrase of Deakin, whilst the states were ‘legally free’, fiscal imbalance left them ‘bound to the chariot wheels of central government’.
And as Ken Henry said in a March 2009 speech, one consideration to bear in mind when assigning taxes in a federal system:
……… concerns how the revenue from taxes is distributed between levels of government. It is usually the case that whoever controls the policy and administration will also receive the revenue – and it is important that governments have some capacity to alter revenue consistent with their marginal expenditure choices.
But it is also usually the case in federal systems that there is an imbalance between the revenue that each level of government raises and its expenditure requirements. For some taxes, therefore, part or all of the revenue may be given to another level of government. Then there is the question of how this revenue is distributed among governments at the same level and with what conditions.
There are trade-offs to be made in this three-dimensional assignment task. The more the policy and administration of the tax system is centralised at the national level, the greater the opportunity to develop a less complex and more efficient tax system.
However, centralisation obviously also means that sub-national governments have a greater reliance on revenue from the national government. And this may influence their spending decisions.
It is the power of the purse that allows the feds to control policy – it has no capacity to simply legislate, or to spend money without constitutional support. As Justices Hayne and Kiefel said in Pape:
.…. it may be accepted that there is some implied legislative power in the Parliament that follows from the existence of the national polity. That power extends to laws putting down subversive activities and endeavours. But that implied legislative power does not extend so far as to encompass the general subject of the "national economy".
Ken Henry said in an August 2009 speech:
.…. I do not anticipate that the (Henry Review) will be recommending that the Commonwealth take over the delivery of any particular services currently provided by the States, nor vice versa. However, we shouldn’t assume that the present allocation of roles and responsibilities is optimal. Much of the fiscal federalism architecture reflects past thinking about the appropriate role of government and the available means of addressing disadvantage.
This often involved the States receiving grants from the Australian Government to help fund State provision of essential services; for example public hospitals, education and housing. The States built hospitals because people needed health care; they built state schools because people needed an education; and they provided public housing as a safety net for people unable to afford private housing services. That these arrangements still persist relatively unchanged today – despite waves of reforms in other product and labour markets – speaks to their success.
But the strains have been showing for a while. Communities expect higher standards of service than many States say they can deliver. Confused responsibilities make it difficult for governments to be held accountable, with impaired incentives to improve performance. It might be time to look at things from first principles. Perhaps a different tax-transfer architecture could assist meaningful reform in this area.
It is finally noted that earlier in the speech, he said:
Once the Panel has considered each tax on its merits, only then are we considering the level of government to which different taxes and transfers should be assigned, taking into account the long-term financial needs of each level of government.
The Abbott ascendency may have put the federal structure as one of the issues in the upcoming federal election due during 2010.
There should be greater clarity of the roles and responsibilities of the various levels of government of the Australian federation.
This is one method of clarifying it.
Firstly, the report of the Australian Future Taxation System (the Henry Report) should be released right away. A report with its own website and trailed considerably in the media should be immediately released rather than released at a time of the Government’s choosing. The public has paid for it. They should be able to see it.
Secondly there should be a ‘Domesday Book’ published listing, for each Australian state and Territory and the Commonwealth:
1. the programmes that are run by each department and statutory authority;
2. the intention of each programme;
3. the benchmarks used to measure satisfactory progress; and
4. the source of funding for the programme.
The document would look something like the List of Australian Government Bodies and Governance Relationships, and would assist in identifying what governments actually do and what duplications exist.
(A document like would have arguably have been better prepared prior to, or in conjunction with, the Henry Report. But there you go.)
Then, drawing on the Henry Review recommendations, the Domesday Book and the law as recently declared by the the High Court in a full constitutional convention (and NOT merely a COAG meeting called to consider an intergovernmental agreement prepared by bureaucrats) similar to those conducted during the 1980s should be called.
Its function would be to act as the forum to determine whether states and territories should be able to develop separate policy responses to particular issues (which could lead to them having different rules and regulations and have different levels of taxation) or whether the Australian Government should possess the general power to determine policy direction either generally or in particular areas of public policy.
From there, decisions should be made as to:
1. which level of government should have responsibility for particular public policy areas;
2. what taxation bases should be assigned to the states and territories; and
3. where it is appropriate for the Commonwealth to be the level of government determining policy outcomes but is an area where it has no clear constitutional capacity to act, whether it is appropriate to confer Commonwealth power either:
(a) indirectly, through an agreement made under section 96 of the Constitution; or
(b) through a reference of power by the states to the Commonwealth or directly by constitutional amendment.
This would be a discussion worth having.