11 January 2010

Towards a constitutional convention

As we have said previously:

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.

06 January 2010

The Henry Report Is In

The Government has apparently received the Henry Report.

Whilst perhaps not as radical as originally trailed, it still apparently:

….mix(es) relief for families and individuals and controversial measures covering the taxation of bank savings, superannuation, petrol, resources, companies and federal-state financial relations.
driven by:

……the challenges of an ageing population, the new baby boom, the rise of China and India, globalisation and the environment.

It will be interesting to see what it ultimately says. As we noted earlier, the Review dropped heavy hints suggesting an increased federal role.

As Henry himself indicated in a speech made during 2009 :

I mentioned earlier that the revenue assignment of each level of government is dependent on how we view respective long-term financial needs. And this, in turn, depends on what we think is the appropriate role of each level of government in improving the well-being of Australians. Which government is best placed to be the financier of government services? Should a particular government be the sole provider of the service, or one provider amongst many? I do not anticipate that the Panel 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 ofgovernment and the available means of addressing disadvantage.
Tony Abbott has now become Opposition Leader.

As we have previously remarked, he is a centralist. And we note his party is ‘thinking about’ whether there should be a referendum on who should run hospitals – an idea illustrating a centralist line of thinking.

Some would argue there is a case for the Feds to run hospitals, given the increase in costs in the sector.

As the then NSW Health Minister said on 1 August 2009:

In NSW, health consumes about 30 per cent of the state budget. Australia's Heads of Treasuries have estimated costs in every state are growing at just under 10 per cent. At that, rate the NSW Auditor-General has forecast our entire state budget will be consumed by health by 2033, leaving not a cent for education, roads, transport, police or disability.

And as the Queensland Chief Health Officer said in her 2008 Report:

The health system in Queensland and Australia is not sustainable under these current and growing pressures. Just 15 predominantly chronic diseases drove 56% of the increase in national healthcare expenditure between 1987 and 2000, with 10 of these diseases related to obesity. In fact, in South Australia it is projected that ‘… by 2042, without significant change to the health system the entire state budget could be consumed by the health care sector’. Similar analyses have not been done for Queensland, the overall magnitude of the outcome is likely to be the same.

There is an argument to say that the sector that effectively funds a particular service should have the political responsibility for it. However, others will disagree.

The current Prime Minister campaigned in the last election for ending the blame game between the states and the Commonwealth, whilst the current Opposition leader has said:

My proposal is not to abolish the states but a referendum to give the national parliament the same authority over them that it’s long had over the territories. It’s not a bid for more power to Canberra. Rather, it’s an attempt to establish clear lines of accountability and responsibility.

The Australian federal structure should thus be a significant issue in the upcoming election contest.

The next article contains some ideas that could be adopted.

The High Court Brings Things Together

Over the last couple of years, the High Court has reconfirmed the interpretation of some of the constitutional provisions underpinning the Australian federal structure.

The Workchoices case reconfirmed the principle that the various paragraphs of section 51 of the Constitution (which sets out many of the powers of the Australian Parliament) should be read widely:

The general principles to be applied in determining whether a law is with respect to a head of legislative power are well settled. It is necessary, always, to construe the constitutional text and to do that 'with all the generality which the words used admit'…..

The Court noted the observations of Sir Owen Dixon in the Melbourne Corporation case when he observed that the net effect of this means:

The position of the federal government is necessarily stronger than that of the States. The Comonwealth is a government to which enumerated powers have been affirmatively granted. The grant carries all that is proper for its full effectuation. Then supremacy is given to the legislative powers of the Commonwealth.

However, the Court has equally confirmed that it cannot spend money for any purpose considered politically desirable – an expenditure must be supported by a constitutional provision.

Following Pape v. Commissioner of Taxation, the 2009 High Court case of ICM Agriculture v.the Commonwealth noted:

It is now settled that the provisions…. of s 81 of the Constitution for establishment of the Consolidated Revenue Fund and in s 83 for Parliamentary appropriation, do not confer a substantive spending power and that the power to expend appropriated moneys must be found elsewhere in the Constitution or the laws of the Commonwealth.
This could put at peril a number of spending programmes in the health, education and housing areas – subject areas where Commonwealth participation cannot be immediately identified in the Constitution.

However, given that the Commonwealth collects the vast majority of taxes they have the power of the purse, with section 96 providing the workaround that permits the Commonwealth to set the agenda in areas not expressly dealt with in the Constitution.

Without going as far as Chief Justice Latham, who said in the First Uniform Tax case that the Commonwealth ‘may properly induce a State to exercise its powers ... by offering a money grant', ICM Agriculture confirmed that the Commonwealth has power to grant financial assistance to any State for any purpose on such terms and conditions as the Parliament thinks fit, provided it didn’t contravene perceived constitutional guarantees relating to religion and on the acquisition of property except on just terms.

These reaffirmations of constitutional doctrine are interesting, given the upcoming publication of the Henry Report, as will be discussed in the next article.