As a broad policy issue federalism is bubbling away.
One bubble about the burst is the decision of the Government to impose a minerals mining resource tax.
The tension arises because one element of the scheme is the provision of a full credit for state royalties paid by a miner.
To limit this exposure, the Feds have been stepping up the pressure on states not to increase royalty rates payable on the extraction of minerals – one of the few ‘own source’ revenues remaining to state level governments.
This is irksome to Western Australia, which relies heavily on royalties revenue.
As Ken Wilshire said in a recent opinion piece:
This is no way to run a federation. Ask the Canadians, who have long faced the challenge of maintaining balance between their resource-rich western provinces and Ottawa. The difference there is that the provinces have a clear and appropriate taxation base. In Canada, as in every federation in the world except Australia, the states have full income taxation powers. (Resource-rich Alberta, home of Prime Minister Stephen Harper, has often had the lowest income taxes made possible by resources taxes.) And progressive federations such as Germany have tax sharing arrangements of a rational nature.
All this points to the way forward for Australia. The forthcoming tax summit must discuss federal finances and especially the hopeless vertical financial imbalance because of the dominance of the national government in taxation. This will forever divide the nation if not corrected. It is badly distorting the accountability of all governments to their electors.
Henry Ergas has said similar things:
The states' abject financial dependence on the commonwealth causes constant conflicts and inefficiencies, while the redistribution of tax revenues from richer to poorer states has reduced the states' incentive and ability to adjust to changing circumstances.
On 8 June 2011 the Secretary of the Prime Minister’s Department (Terry Moran) gave a speech called the Challenges of Federalism.
He largely lauded the 2008 Intergovernmental Agreement on Federal Financial Relations which established an institutional framework as the basis to establish jurisdictional cooperation.
He then listed three things the States could do:
First, the states should continue to work with the Commonwealth to ensure the Intergovernmental Agreement achieves its goal of focused, incentive-based program delivery.
This is especially important in health, education, skills and workforce development, disability services, affordable housing and indigenous reform.
Second, the states should engage seriously with the review of Horizontal Fiscal Equalisation, and ensure the incentives in the arrangements are consistent with good governance and continuing reform.
And, third, the states should deliver on the promise they made when the GST was introduced, to reform their own tax bases in return for the stability of funding it provides.
Unless the states can rise to these challenges, there is a risk that the public will expect the Commonwealth to be more assertive in dealing with them – and that poses the risks of weakening the connection between government and citizens at the local level.
He then listed three things the Feds could do:
First, the Commonwealth must continue to restrain its tendency to control an excessive number of inputs on national Specific Purpose Payments.
Second, the Commonwealth should allow for and support localised approaches to reform, and rely less on all-embracing boilerplate policies and programs once the basic system architecture is agreed.
And, third, the Commonwealth should move towards strategic partnerships with the states and territories where it makes sense to share accountability for outcomes.
Moran finally mentioned a concept of the ‘grand deal’.
The concept of a grand bargain has an interesting history. In 1976, Malcolm Fraser sought to counter what he saw as the excesses of the Whitlam years with a proposal to share the income tax base, providing the states with a more reliable source of revenue. Bob Hawke tried again in 1990 and 1991 with a different proposal: taxation powers would be reallocated in return for the states taking clear responsibility for particular areas of policy, including some areas within the Commonwealth’s authority. That proposal was fateful – or should I say fatal, at least for Bob Hawke, after Paul Keating used it as a weapon in his fight with Hawke for the prime ministership.
There is indeed a history to the ‘grand bargain’. It is reviewed in the next article, followed by an article that proposes how the federalism debate can advance.