The tax forum as a platform for a grand bargain?

In his Challenges of Federation speech we referred to in a previous article, Prime Minister’s Department Secretary Terry Moran said:

There are business leaders who hold the view that Australia can’t work well unless states cede regulatory authority to the Commonwealth, and that as much as possible affairs should be run from the centre. Proponents of this view often see government as a giant corporation, where everything is subject to the power of the CEO. This is not an arrangement for stable and effective democratic government. It is a recipe for authoritarianism, and would be a long way from the liberal democratic ethos we now enjoy.

Yet this is how the Australian federal model operates.

In an earlier article we referred to Peter Phelps’ maiden speech to the NSW Legislative Council.

In another part of the speech he said:

The problem (with the Australian federal structure) is compounded by vertical fiscal imbalance or, to put it in the language of humans rather than economists, the States have the attitude of teenagers:

"Come on, dad, give us some more money.""Why don't you just get a job, son?""Aw, dad, now you're just being mean".

This puts the situation well.

The Intergovernmental Agreement on Federal Financial Relations provides:

The Commonwealth will provide National Partnership payments to the States and Territories to support the delivery of specified outputs or projects, to facilitate reforms or to reward those jurisdictions that deliver on nationally significant reforms or service delivery improvements.

The National Policy and Reform Objectives underwriting the Federal Financial Relations IGA reads:

National Partnership incentive payments will be provided to reward the States and Territories which deliver reform progress or continuous improvement in service delivery.

These payments will be structured in a way that encourages the achievement of ambitious milestones or performance benchmarks.

Graduated benchmarks may be specified in National Partnership agreements to provide that States receive some proportion of funding for activity that has not fully achieved the reform or service delivery objectives but has resulted in partial attainment of the agreed outcomes.

The achievement of milestones and performance benchmarks will be assessed by the independent COAG Reform Council, in order to provide transparency and enhance accountability in the performance assessment process.

National Partnerships should set out clear, mutually agreed and ambitious performance benchmarks that can be assessed by the COAG Reform Council. These should be structured in a way that encourages the achievement of ambitious reform targets and continuous improvement in service delivery, and provide better outcomes than would otherwise be expected.

A practical example of a ‘reward payment is clause 32 of the National Partnership Agreement to Deliver a Seamless National Economy which provides:

32. The Commonwealth will provide reward payments to the States and Territories following CRC advice as to the achievement of key milestones, as set out in the Implementation Plan for the 27 deregulation priorities. The maximum distribution of funds to be paid is set out in Table 1 above.

And as we referred to in an earlier article, the NSW Parliament passed reforms relating to directors liability because they were reforms as they were COAG reforms for which reward payments were payable for ‘meeting key milestones’ - and the NSW Government was keen to secure passage to win ‘brownie points’ for making the necessary changes to the law.

If the state’s play up the Feds won’t pay up.

And, despite the wishes of Terry Moran the Commonwealth is hardly slowing down the areas of public administration in which it wishes to become involved.

The last article discussed the grand bargain that never was.

It was a pity a succession struggle within the federal ALP derailed an attempt of a grand bargain.

We remain of the view there should be a grand bargain establishing:

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.

Clearly, the proposed tax forum to discuss the Henry Tax Review to be held on 4 and 5 October 2011 would be the perfect opportunity

Except it won’t happen.

The forum will apparently:

....continue the decade-long conversation we started with the release of Australia's Future Tax System (AFTS) Review last year. It will focus on the broad sweep of topics in the Review, with sessions to discuss personal tax, transfer payments, business tax, state taxes, environmental and social taxes, and system governance.

But won’t discuss the GST, areas of the Henry Review the Government has already indicated it won’t implement and most importantly what elements of the federation will perform which function.

This is a wasted opportunity.

Bob Hawke and Nick Greiner's grand bargain

A grand bargain realigning state and federal taxation streams and responsibilities was mooted during the early 1990s.

The history was set out in the Victorian Parliament’s Federal-State Relations Committee Inquiry Into Overlap and Duplication of Roles and Responsibilities Between the Commonwealth and the State; and Areas of Responsibility for Which the States Should Have an Enhanced Role for the Benefits of the Federation:

6.22 The impetus for change to Australia’s federal system arose from a conjunction of political conditions. Bob Hawke, a Labor Prime Minister, and Nick Greiner, a Liberal Premier, shared common goals of microeconomic liberalisation and Commonwealth-State relations reform, as well as a common managerialist perspective on government. The fact that all the other State Premiers were Labor reduced differences among them over the agenda for change. The combination of a strong leader among the Premiers and a consensus oriented Prime Minister led to the adoption of a collaborative, consensual approach. This bipartisan, Commonwealth-State political commitment to the creation of a truly integrated national economy, and to the rationalisation of government roles, ensured momentum at the early stage.

6.23 The Hawke-Greiner partnership is symbolic of an implied comprehensive exchange. The microeconomic liberalisation that the Commonwealth was seeking would lead to uniformity of regulation, and a lessening of State intervention in the economy. In return for this reduction in their power, a realignment of roles and responsibilities, in combination with fiscal reform, would grant the States revenue and autonomy adequate to their expenditure responsibilities. The agenda was broader under Hawke than at any subsequent stage, and this comprehensive exchange seemed a real possibility.

6.24 This potential exchange collapsed in late 1991, with Paul Keating’s challenge to the Labor leadership. Keating sensed that Hawke did not have the support of the Labor caucus for fiscal and program devolution, and proceeded from late October 1991 to challenge Hawke largely on these grounds.

Keating's action dismayed the premiers. They read out consistent statements in their respective state parliaments.

For instance Wayne Goss told the Queensland Parliament:

……Twelve months ago (in 1990), a new process for reforming the Australian Federation was commenced in Brisbane. That process sought to rationalise the financial relationship between the Commonwealth and the States, to rationalise functional responsibilities between the various levels of Government in order to minimise duplication and to improve the economic efficiency of the country through the implementation of wide-ranging micro-economic reforms.

As the Prime Minister and the Premiers agreed in the Sydney communique, the Perth conference would— “consider the crucial and interrelated issues of reform of Commonwealth/State financial arrangements including reviewing the distribution of taxation powers to reduce vertical fiscal imbalance and a clearer definition of the roles and responsibilities of the respective Governments in the areas of program and service delivery . . .”

In preparation for the Perth conference the States, large and small, Labor and conservative, developed a position paper containing a range of proposed reforms. First and foremost, the States agreed on a shared national income tax proposal whereby an agreed percentage of national income tax receipts would be returned to the States. This was to be achieved by a parallel reduction in financial assistance grants to the States and a reduction by the same percentage in the Commonwealth income taxation rate. This meant no increased taxation burden for Australian taxpayers. This meant providing the States with access to a growing source of revenue capable of guaranteeing our delivery of crucial services into the future. This also meant no diminution in the Commonwealth’s capacity to manage the national economy.

Secondly, the States advocated the establishment of a council of the Australian Federation comprised of the heads of Government of the Commonwealth and the States. This body was to provide a continuing mechanism through which the range of micro-economic reforms already initiated in this process could be sustained in the future.

It was also to provide a means by which rational decisions could be taken on the future delineation of functional responsibilities between the two levels of Government. Most critically, this proposed council was to assist in lifting the vision of both the Commonwealth and the States above their own narrow and immediate interests and to concentrate instead on the pursuit of the national interest.

Yesterday in the Commonwealth Parliament the Prime Minister stated that the Commonwealth Government could not support the States’ “shared national income tax proposal”. However, in rejecting this option, the Commonwealth Government has not advanced any sound policy reason as to why this proposal is unacceptable. Indeed, a joint report prepared by the Commonwealth and State Treasuries indicated that proposals such as the one advocated by the States would result in a significant reduction in vertical fiscal imbalance without compromising the Commonwealth’s legitimate requirement to maintain macro-economic control and without violating the principles of fiscal equalisation.

Furthermore, the same Treasuries’ report notes that other successful federations, for example, the United States,Canada and West Germany, are able to manage their national economies with markedly lower levels of vertical fiscal imbalance than Australia.

Regrettably, my colleagues—the other Premiers—and I have concluded that the States’ taxation reform proposal has been jettisoned for reasons other than those of a policy nature. Notwithstanding last-minute discussions late yesterday and again today, it appears that the Commonwealth is immoveable on this point. Given this position, and given that the reform of Commonwealth/State financial relations is fundamental to the whole reform of Australian federalism, the States reluctantly concluded that it was impossible to proceed with the Perth conference. To do so would have been to yield sound policy to the requirements of political expediency. …..

Whilst the discussions that led to the implementation of the 1995 competition policy agreements continued, the opportunity of a ‘grand bargain’ was lost.

The Challenges of Federalism

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.

Is harmonisation a euphemism for subjugation of the states?

Peter Phelps is a new member of the NSW Legislative Council.

As is the wont of maiden (or, as they are now grandly called, so as not to offend maidens, inaugural) speeches, the new member canvassed a number of different issues.

Perhaps unusually for a state MP making his first speech, he wondered about the point of maintaining the concept of provincial government, making some of the usual observations:

What relevance do the States then have? Not much by any assessment. They are too small to encompass the cultural and too large to encompass genuine communities of interest. To that end, Alex Hawke, who is in the public gallery today, kindly faxed me a copy of Jack Lang's 1930 Abolition Bill, with the suggestion that it would be an excellent first private member's bill for me to introduce. I doubt whether I will be taking him up on that offer at this time.

But if we are just going to be a way station for the Federal Government and its dictat, then why not? Why not abolish the Legislative Council and the Legislative Assembly. Why not abolish the State Government entirely? What purpose do we serve if we are straight-jacketed within federally mandated systems of education, water, land use, fishing, and environmentalism? Since the engineers case, the High Court has permitted a gradual accretion of power and interference in State matters.

Harmonisation has become a euphemism for subjugation. What is the use of this? Are we simply an imperial bauble perched atop a colonial anachronism, the errand boys of the Federal Government? If States are to remain relevant we must fight for real competitive federalism—not cooperative federalism—with genuine competition between the States, not this collectivist begging bowl approach. If you want to be a pot smoking Mullumbimby hippie, fine—but do not expect me to subsidise your lifestyle. Similarly, if a State has resources that are left unused, why should it expect us to subsidise a lifestyle for which it is unwilling to pay? If the distribution of revenue to the States was done on the basis of direct parity with its collection, then fine. It is not perfect but at least it would be a just outcome. But at this time horizontal fiscal equalisation, as it is called, is just an excuse to rob the productive to pay the lazy.

Whether through grand design or humorous coincidence the very next business in the Council was the thrillingly named Miscellaneous Acts Amendment (Director’s Liability) Bill 2011

The reason for introducing the legislation was because:

(t)hese amendments will ensure that New South Wales legislation imposing this type of liability accords with the set of principles agreed by the Council of Australian Governments [COAG] to guide the reform and harmonisation of directors' liability across Australian law.

As the Attorney-General said in the Legislative Assembly:

I thank honourable members for their contributions to the debate. In particular I thank the member for Liverpool, who said the Opposition does not oppose the legislation, which we are pleased about because it is important Council of Australian Governments [COAG] legislation. In response to the member for Liverpool, these reforms are part of a COAG National Partnership Agreement under which there are reward payments to the States for achieving key milestones.

One of these key milestones was for legislation implementing these reforms by December 2010. The Liberal-Nationals Government was not in office at that time. However, perhaps we can get some brownie points, because these milestones may be reviewed by COAG and there may be a second tranche of reforms at a later stage.....

Somewhat proves Phelps’ point, really.

There have been some developments in the federalism debate recently. They are discussed in the next couple of articles.

The slow breakdown of COAG – Part 2

Gerry Gleeson formally ran the NSW Public Service.

He said in a recent speech:

Both parties, nationally, seem determined to diminish and erode the powers of the states.

State governments must accept that the Council of Australian Governments will play an increasingly important role in formulating national policies. NSW must not abdicate policy development. We must be leaders and not followers. NSW must be represented at COAG by highly talented officers with passion, purpose and policies to ensure the state gets a fair go.

Gleeson implicitly gives COAG the status of a parliament – something the political players have now tumbled to:

Critics of COAG have included Mr Barnett, who has said that COAG has become almost a new tier of government and lacks accountability and transparency. Mr Barnett has said that with 43 ministerial councils, it was too much....

A review of the COAG process is to be conducted by the heads of Australian treasuries.

The review will look at how well the interlocking COAG agreements are operating as well as whether there is a need for clearly specified responsibilities for governments as well as the development of sufficient performance benchmarks.

Unfortunately, one thing not reviewed is the overall capacity of the states and territories to fund any identified ‘clearly specified responsibilities’.

In that context it is interesting to see the emergence of the relationship between the payment of the proposed mineral resources rent tax (MRRT) and state based royalties as an issue.

According to the mining companies (BHP Billiton, Rio Tinto and Xstrata) a term of the document that allowed the ALP to say there was an ‘agreement’ about a mining tax before the election was a promise the Commonwealth would refund the value of state and territory royalties paid by the mining industry.

The Feds now claim that refunds will be paid on the basis of the relevant formula (or any announced variations) in force as at 2 May 2010 - the day the agreement was made was made.

This poses the question of what happens if a state increases a royalty amount.

The Sydney Morning Herald reports that the Government may withhold transfer payments to the States such as the GST if they effectively challenge the collection rate from the mining tax by increasing royalties.


We had anticipated this probable outcome:

The fact is the federal government requires a lot of money to fund the broad ‘social democratic project’ established by pl.51(xxiii) and (xxiiiA) of the Constitution –income transfer payments, health, hospitals and (undoubtedly in the immediate future) disability support and will need more money (and not less) as an increasing number of worthy needs are identified as requiring support in a country with an aging population and an atomising society.

A simple illustration: an portion of the proposed RRT is to help ‘build the roads, rail, ports, electricity and water supply, and other facilities needed to unlock Australia’s resource wealth’.Like housing, health and education, these are subject matters formally considered to be largely state responsibilities increasingly falling under Commonwealth control.

The Feds will increasingly need tax revenues to fund their projects in these areas on their terms. Then there is the ‘seamless economy’ and the wish to remove duplication.

Currently, the Government proposes that miners pay both royalties and the RRT, with royalty payments a claimable tax rebate. But it won’t be too long before calls are made that this is an inefficient way of doing things – only one tax should be levied (in this case) on the extraction of minerals. There isn’t much doubt which tax will go. (our emphasis)

As The Australian reported, the WA Premier has made his views clear:

Referring to the Rudd government's initial resource super-profits tax, Barnett says: ‘With 65 per cent of this revenue coming from Western Australia, it was seen as an attack on the mining industry and on our resource income base. People talk about these resources belonging to all Australians. Well, constitutionally, they don't. They belong to the people of each state.

In its 28 October letter to the Policy Transition Group (the Committee assisting the Government in implementing the MRRT) the Chamber of Minerals and Energy of Western Australia’s (CME) makes some pretty obvious points:

In relation to state royalties, CME has always maintained a strong preference for retention of the current state regime, administered by the state government and with revenues flowing to the state. The state has prime responsibility for resource project approvals and the provision of non-privately owned infrastructure. As such, it is imperative the state government maintains and receives a dividend for WA resources.

It is now reported in The Age that the Treasury ‘is considering using its tax power in the constitution to 'pursue unilateral legislation’ for poker machine reforms.’

Whatever the merits of having the Commonwealth regulate gambling, the decision again attacks the capacity of states and territories to make spending decisions confident that there is a stream of ‘own source’ income available to support the decision.

Whilst it may not be immediately apparent to the players, the issues of who does what in the Australian federation and how states should receive the funds to discharge ‘allocated responsibilities’ are now coming to a head.

Funding the Social Democratic Project (and the Federal Structure)- comments on the Henry Review

The Report on Australia’s Future Tax System (the Henry Report) has finally been released by the Government.

As expected from his various speeches, the Review canvasses a number of different policy areas.

It will be a smorgasbord of policy options that will be dined on over the years as was the 1975 Asprey Report.

We will satisfy ourselves with two observations.

The first is what constitutes a ‘super profit’. It would appear the starting point of what constitutes a ‘super profit’ is the ten year government bond rate (currently averaging 5.7%) – the figure identified as the ‘risk free return benchmark’.[1]

We would hope that any return above the risk free return benchmark would not become the standard benchmark for ‘super’ profits made in the (insert here the industry to be picked off) whenever government requires extra revenue.

By definition it would discourage risk taking – the very thing that keeps the economy advancing.

The second relates to the fiscal federal structure.

Economists tend to think that a federal structure is an anathema to their guide star of allocative efficiency.

Whilst begrudgingly acknowledging that Australia will have three levels of government ‘at least for the foreseeable future’[2], the Review nevertheless acknowledged that as long as State governments have significant expenditure responsibilities they should have access to significant and sustainable tax revenue with a residual own source taxation capacity to finance marginal expenditure decisions.[3]

However, the Review nevertheless recommended on efficiency grounds that a resource rent tax (RRT) replace state based royalties as the way to bring mineral extraction to taxation - with the Australian and State Governments to ‘negotiate an appropriate allocation of the revenues and risks from the resource rent tax’.[4]

The report also suggests the abolition of a slew of State based taxes.[5]

In particular, payroll tax would be replaced in favour of a broad based ‘cash flow tax’ imposed at a uniform rate across Australia (and thus deprive states the further capacity to change the rate to suit the needs of the jurisdiction).[6]

It also suggests that the States and Australian Government could share, in particular, the income tax base.[7]

It is clear that for these reforms to work, the Commonwealth would have to allow the states some access to income tax and a reasonable flow of resource rent tax revenues.

It ain’t going to happen.

The Review adopted the standard view that as the national government is better placed to coordinate actions, taxes used to redistribute income should be levied by the national government.[8]

The fact is the federal government requires a lot of money to fund the broad ‘social democratic project’ established by pl.51(xxiii) and (xxiiiA) of the Constitution –income transfer payments, health, hospitals and (undoubtedly in the immediate future) disability support and will need more money (and not less) as an increasing number of worthy needs are identified as requiring support in a country with an aging population and an atomising society.

It is also the fact (undoubtedly assisted by taking in 82 per cent of total tax revenue[9]) that the Feds are assuming more and more state government responsibilities.

A simple illustration: an portion of the proposed RRT is to help ‘build the roads, rail, ports, electricity and water supply, and other facilities needed to unlock Australia’s resource wealth’.

Like housing, health and education, these are subject matters formally considered to be largely state responsibilities increasingly falling under Commonwealth control.

The Feds will increasingly need tax revenues to fund their projects in these areas on their terms.

Then there is the ‘seamless economy’ and the wish to remove duplication. Currently, the Government proposes that miners pay both royalties and the RRT, with royalty payments a claimable tax rebate.

But it won’t be too long before calls are made that this is an inefficient way of doing things – only one tax should be levied (in this case) on the extraction of minerals. There isn’t much doubt which tax will go.

Finally, there is the history of Australian federation.

As the report itself says:

Tax sharing of income tax operated in Australia before the Second World War, although there was little coordination between the two levels of government. In 1976, the Australian Government introduced the possibility of the States levying a personal income tax surcharge to replace financial assistance grants. No State took up the option. A key reason for this was that the Australian Government did not reduce its own tax rates to make room for the States.[10]

As the report itself admits, the States are more likely to be tied to the Deakin’s ‘chariot wheels of central government’ tighter than ever before:

The implementation of a number of recommendations related to state taxes would require cooperation between the Australian government and the states. Further, some recommendations related to Australian government taxes would also impact on State taxes……... Depending on when some of the recommendations are implemented, the states may also be subject to losses in revenue that could not easily be made up from other revenue sources (our comment – ask WA about the loss of royalties!) funding from the Australian government may at times be necessary to ensure that the financial position of a state is not adversely affected.[11]

As we have recently said, it is time to decide

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.

The Henry Review advances the discussion.

However, following the firestorm arising from the introduction of the RRT this is a matter that should form part of the discussion at the next election.

[1] See Part C1-1 of Volume 2 of the Report (esp.p.223 and footnote 2 of page 332 of volume 1)
[2] Page 570 of Volume 2
[3] Page 574 of Volume 2
[4] Page 680 of Volume 2
[5] See table on page 680 of Volume 2
[6] Page 681 of Volume 2
[7] Page 682 of Volume 2. The Commonwealth would retain control over the tax base.
[8] Page 673 of Volume 2
[9] Page 676 of Volume 2
[10] Page 682 of Volume 2
[11] Page 684 of Volume 2

Fifield vs. Abbott: the confused state of the Liberal Party on federalism

In a recent article for The Punch, Mitch Fifield wrote a copperplate defence of Australia’s federal model.

The principles of Federalism are timeless. Liberals believe in the principle of subsidiarity: that power, where possible, should be located as close as possible to the people so that it is responsive to their demands. Liberals are wary of concentrating power in the hands of a small number of people. Liberals also believe in checks and balances – abolishing or rendering state governments impotent would leave a federal administration’s power virtually unchallenged.

Liberals also believe in competition. States competing for jobs, investment and talent should lead to lower taxes, lighter regulations and more attractive communities to live in.

He had better have a chat with Tony Abbott, who has different views about the issue:

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 Liberal Party is the erstwhile party of federalism: it certainly is no longer the ‘states rights’ party, as the Howard Government’s use of the corporations power to federalise Australia’s industrial relations laws illustrates.

The Fifield/Abbott discussion is a healthy one to have whilst a party is in opposition.

However, as we have previously discussed the Henry Review will raise the issue of whether Australia should be viewed as a federation or a single market, whilst in our previous article we noted the idea of whether state parliaments have a role in setting standards will be challenged as interested stakeholders challenge one size fits all legislation designed to bring about a ‘seamless economy’.

Both these developments and the fact that Australia is slowly lurching towards a federal election means that the Liberal Party will need to have some view as to how they see the federation operating – perhaps far sooner than they imagine.

Tony Abbott sets the battlelines for the federalism debate

Tony Abbott has written an article in The Australian that confirms his preference for what is effectively unitary government for Australia.

He first expressed this view in his book Battlelines.

In his newspaper article Abbott says:

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.

He wants constitutional change so as to permit the Australian Parliament to make laws for the ‘peace, order and good government of the country’ – that is, confer on the national parliament the plenary power to make laws on anything.

Despite what he says, it is a bid for more power to Canberra.

The structure of the Constitution means there are some areas where the Commonwealth cannot legislate. Allowing the Commonwealth Parliament to legislate over any given subject necessarily means the Commonwealth gains power.

A bit of honesty would help debate.

Moreover, even though the travails of the Defence Department chronicled by Malcolm Farr in the Daily Telegraph suggest that not every area of commonwealth administration is an example of perfection, the Australian article gives the clear impression that Abbott thinks that the Feds run things better because, well…. they’re the Feds.

He says:

Similarly, at least since Queensland abolished death duties in the 1970s, there are no discernable examples of good policy adopted by one state and then copied by the others that would render plausible the argument that ‘states area laboratory for policy change’.

Anyone comparing commonwealth government health programs (such as Medicare and the Pharmaceutical Benefits Scheme
delivered by private doctors and pharmacists) with state government ones (such as public hospitals run by giant bureaucracies) would have to conclude that Canberra understands the subsidiarity principle far better than the states.

Taking the last observation first, if you are going to compare things you should compare like with like.

Both Medicare and the PBS are designed from the ground up as subsidy schemes with the intention to reduce the cost of particular goods and services to consumers and no more.

Hospitals provide direct medical services.

It may well be better if public hospitals were privately owned, thus facilitating the creation of a real contestable market in the provision of hospital services.

But comparing the administration of subsidy schemes with the administration of institutions providing services is a false analogy.

That said, there is an absence of modern examples of how the federal system has developed a novel policy development slowly picked up by other jurisdictions.

The development of modern seat belt laws is the usual example trotted out – but that is now nearly 40 years old.

Moreover, as a recent intervention by Queensland Treasurer Andrew Fraser has recently suggested, without own source revenues there are limits to what a state can do as a ‘sovereign’ jurisdiction.

By implication, there is only limited capacity for a state to be a policy ‘laboratory’.

The debate will be assisted if a list of tangible policy initiatives developed in one state and adopted in others can be identified, so a final decision can be made as to whether in the 21st century there are advantages to a genuine federal system, or that in fact Canberra is always right after all.

COAG Meets in Darwin and Paul Everingham scrubs the States

COAG met in Darwin on July 2.

The previous day – Territory Day - the NT News reported comments from the ‘father of Self Government’ Paul Everingham which said that states and territories were a waste of taxpayer money and that the Northern Territory should be run out of Canberra.

He was reported as saying that when self-government for the NT was granted 31 years ago:

‘Back then people were still getting telegrams…but communication has improved. It is the internet age. People can also fly everywhere on relatively cheap airlines'.

This is a more earthy way in expressing something we have mentioned in an earlier article:

Many will say the Seamless Economy Project is good idea - Australia is an integrated common market, with people and companies commonly undertaking activities across state borders.

Moreover, Australia exists in a globalised world, with the complication of different rules in different states a reason not
to come to Australia.Regulatory difference is nothing more than a mere compliance cost that distort allocative efficiency with no public benefit.

The majority of the COAG decisions appear to underline the Everingham view of the world.

Those decisions include:

1. the development of a national regulatory body for vocational education and training;
   
2. the development of a unified national system of child care licensing;
   
3. the Coordinator-General mechanisms set up by the Commonwealth to take responsibility for Nation Building programs and projects funded by the Commonwealth and delivered by the States under the Building Australia Fund, the Education Investment Fund and the Health and Hospitals Fund;
   
4. the creation of national regulation for maritime safety, rail safety and heavy vehicles, including the appointment of the Australian Maritime Safety Authority as the national safety regulator for all commercial shipping in Australian waters and a single national heavy vehicle regulator; and
   
5. the development of national performance measures for development applications (DA).
   

Quite a list really for one COAG, really.

And there are other Ministerial Councils working on uniform legislation.

For instance, the Standing Committee of Attorney-Generals (SCAG) is working on the issue of whether there should be a national regulator for the legal profession, as well as on uniform succession laws on administration of estates of deceased persons.

This followed a debate immediately before the Darwin COAG as to whether the Federal Government should take over the administration of the hospitals system.

The time is coming where an overt (rather than a covert) decision should be made as to whether Australia is to be a federation or a unitary nation.