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.
Showing posts with label constitutional reform. Show all posts
Showing posts with label constitutional reform. Show all posts
28 June 2011
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 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.
12 June 2011
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:
The reason for introducing the legislation was because:
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:
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 2011What 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.
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.
10 November 2010
COAG - Quo Vadis?
We have previously indicated 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, agreements made under section 96 of the Constitution; or
(b) a reference of power by the states to the Commonwealth or directly by the states or by constitutional amendment.
The political class really must come out one way or another and declare whether Australian States are either:
1. ‘incubators of innovation’ within a country where there is genuine ‘competitive federalism’ –where different jurisdictions will make different rules and regulations and have different levels of taxation, with each jurisdiction ultimately picking up what is ‘best practice’ or face the loss of people and investment; or
2. effectively English style County Councils providing a narrow range of services within an Australia with a single seamless economy with a centrally set of rules and taxation levels in force uniformly throughout the country.
The Senate has quietly formed a Select Committee on the Reform of the Australian Federation.
Only constitutional (and parliamentary) savants would have known that the Committee existed.
It would appear that some respondents are disposed towards something called a ‘Convention for the Federation’.
Others submissions are keen to ensure that the position of COAG within the federation is either formalised or, at the very least, clarified.
The Select Committee is currently to report by 17 November 2010.
In our view the work of:
(a) the Select Committee (and its submitters);
(b) the Henry Review on Taxation;
(c) the treasury heads report to be prepared for COAG; and
(d) a ‘Domesday Book’ which 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
would both form the basis of developing suitable terms of reference of a ‘Convention for the Federation’ as well as commence the conversation that would accompany the creation of such a body.
It will be interesting to see how reform of the federation will fare within Canberra’s ‘new political paradigm’.
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, agreements made under section 96 of the Constitution; or
(b) a reference of power by the states to the Commonwealth or directly by the states or by constitutional amendment.
The political class really must come out one way or another and declare whether Australian States are either:
1. ‘incubators of innovation’ within a country where there is genuine ‘competitive federalism’ –where different jurisdictions will make different rules and regulations and have different levels of taxation, with each jurisdiction ultimately picking up what is ‘best practice’ or face the loss of people and investment; or
2. effectively English style County Councils providing a narrow range of services within an Australia with a single seamless economy with a centrally set of rules and taxation levels in force uniformly throughout the country.
The Senate has quietly formed a Select Committee on the Reform of the Australian Federation.
Only constitutional (and parliamentary) savants would have known that the Committee existed.
It would appear that some respondents are disposed towards something called a ‘Convention for the Federation’.
Others submissions are keen to ensure that the position of COAG within the federation is either formalised or, at the very least, clarified.
The Select Committee is currently to report by 17 November 2010.
In our view the work of:
(a) the Select Committee (and its submitters);
(b) the Henry Review on Taxation;
(c) the treasury heads report to be prepared for COAG; and
(d) a ‘Domesday Book’ which 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
would both form the basis of developing suitable terms of reference of a ‘Convention for the Federation’ as well as commence the conversation that would accompany the creation of such a body.
It will be interesting to see how reform of the federation will fare within Canberra’s ‘new political paradigm’.
25 September 2010
Pairing the Speaker
The debate on whether the Speaker of the House of Representatives should be ‘paired’ to compensate for the fact that the Speaker only has a casting vote continues appears to have been settled.
The Australian Constitution anticipates that sometimes ties will happen, and when they do the Speaker will break the vote - and that is the designated role of the position.
As the bible of the British Parliament, Erskine May, says:
As they did in NSW, if you want to change the voting power of the Speaker you really do have to change the Constitution.
The NSW Constitution only gave the Speaker only had a casting vote until 2007.
To accommodate the wish of an Independent Member of Parliament encouraged by the NSW ALP to become Speaker to participate in debates and vote when an issue important to his electorate came up (much like what Rob Oakeshott appeared to want to do federally) the law was changed.
Now, so long as the Speaker is not presiding, he can participate in debate and vote.
However, the Constitution had to change to allow this to happen.
As the Solicitor-General’s advice makes clear, the agreement of parliamentary reform sealed with a ‘man hug’ during the discussions to form a government can be honoured - it is quite possible for a party to organise for one of its own to abstain to ‘match’ the vote of the otherwise non-voting speaker if they want, thus creating a constitutional ‘work around’.
That said, the question of whether ‘pairing’ the Speaker is a good idea remains.
For better or worse, Australians returned an equally balanced parliament. Sometimes, ties will happen. And the Speaker will have to make a casting vote.
Had the Liberals stuck to the ‘pairing agreement’ they would have explain to the millions of people who voted for it that where otherwise the vote in the House would be tied, in the name of ‘stability’ one of its members abstained from voting - thus allowing through something contrary to its constituent’s interests like a mining tax or carbon tax or any other controversial measure that will invariably come up - in a circumstance where otherwise, if custom was followed by the Speaker, the matter would not have passed but rather stayed in the House for further consideration.
The ALP would of course have been in the same conundrum if they were in Opposition.
The result of the election will therefore be properly reflected in the votes of the House.
Strap in for a wild three years.
The Australian Constitution anticipates that sometimes ties will happen, and when they do the Speaker will break the vote - and that is the designated role of the position.
As the bible of the British Parliament, Erskine May, says:
‘If the numbers in a division are equal…the Speaker, who otherwise never votes, must give the casting voice. In performance of this duty, he is at liberty to vote like any other member, according to his conscience, without assigning a reason: but, in order to avoid the least imputation upon his impartiality, it is usual for him, where practicable, to vote in such a manner as not to make the reason of the House final and to explain his reasons….’
As they did in NSW, if you want to change the voting power of the Speaker you really do have to change the Constitution.
The NSW Constitution only gave the Speaker only had a casting vote until 2007.
To accommodate the wish of an Independent Member of Parliament encouraged by the NSW ALP to become Speaker to participate in debates and vote when an issue important to his electorate came up (much like what Rob Oakeshott appeared to want to do federally) the law was changed.
Now, so long as the Speaker is not presiding, he can participate in debate and vote.
However, the Constitution had to change to allow this to happen.
As the Solicitor-General’s advice makes clear, the agreement of parliamentary reform sealed with a ‘man hug’ during the discussions to form a government can be honoured - it is quite possible for a party to organise for one of its own to abstain to ‘match’ the vote of the otherwise non-voting speaker if they want, thus creating a constitutional ‘work around’.
That said, the question of whether ‘pairing’ the Speaker is a good idea remains.
For better or worse, Australians returned an equally balanced parliament. Sometimes, ties will happen. And the Speaker will have to make a casting vote.
Had the Liberals stuck to the ‘pairing agreement’ they would have explain to the millions of people who voted for it that where otherwise the vote in the House would be tied, in the name of ‘stability’ one of its members abstained from voting - thus allowing through something contrary to its constituent’s interests like a mining tax or carbon tax or any other controversial measure that will invariably come up - in a circumstance where otherwise, if custom was followed by the Speaker, the matter would not have passed but rather stayed in the House for further consideration.
The ALP would of course have been in the same conundrum if they were in Opposition.
The result of the election will therefore be properly reflected in the votes of the House.
Strap in for a wild three years.
11 May 2010
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:
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
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
11 January 2010
Towards a constitutional convention
As we have said previously:
It is finally noted that earlier in the speech, he said:
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.
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.
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