Fiscal federation


Published in The Australian, May 6, 2013


WHO could forget where they were on the day news broke that Kevin Rudd had unveiled the National Health and Hospital Network? Or, to put it another way, does anyone actually remember?

It would be “the most significant reform of Australia’s health and hospital system since the introduction of Medicare”, Rudd told the National Press Club in March 2010.

He had commissioned “the most comprehensive structural review” of hospital services in 20 years. There had been “a comprehensive consultation process” involving more than 100 forums around the country, 21 of which the former prime minister had personally attended.

The language of reform as spoken by Rudd was virtually incomprehensible, but like his speeches in Mandarin it was broadly assumed that he must have been making sense to someone.

At least he knew that federal-state relations needed fixing — “the current system is a total mess … there is just too much duplication, overlap and waste,” he told the Press Club — but his preferred solution would only make the situation worse.

That is because Rudd, in his bones, was a centralist who thought the solution for poor management at state level was to put everything in the hands of quality bureaucrats, the kind that could be found only in Canberra.

Central planning, targets, nation­al standards, reporting, transparency, empower­­­ment, time­frames, co-ordination, relevance, leveraging funding responsibility: the words rolled off the tongue of the arch technocrat with barely a pause for breath.

“Doctors want this,” Rudd said. “Nurses want this.” In hindsight it is easy to see the bluff and bluster.

If Rudd accomplished nothing else in office he did at least perform a useful service in disabusing us of the notion that Canberra knows best.

Before Rudd came to power the glaring deficiencies of state health bureaucracies pushed even Tony Abbott into toying with the idea of a commonwealth takeover, albeit one that allowed greater scope for local decision-making.

After Rudd nobody is likely to make that mistake again. The lines of overlapping responsibility must be disentangled, but Canberra should be doing less, not more.

The government’s Commission of Audit suggests states be made to stand on their own two feet by being encouraged to raise their own income tax for the first time since 1942, when John Curtin’s Labor government imposed fiscal centralism as a temporary war measure.

It was a drastic erosion of the power of the states that fulfilled Alfred Deakin’s gloomy prediction the states would find themselves “legally free, but financially bound to the chariot wheels of the central government”.

Thomas Playford’s South Australian government was quick to challenge in the High Court in the first Uniform Tax Case, but it lost.

Fiscal decentralisation is an idea worth reconsidering. Federal income tax would be slashed, since Canberra would have to send fewer cheques to the states. States could set rates as they pleased, allowing them to compete with one another.

Imagine how a South Australian premier, governing in the spirit of Playford, might respond to an invitation to become fiscally independent once again.

A proud leader would drive South Australia’s cost advan­tages, cutting income tax to provide an incentive for other income-earning Australians to migrate to the beautiful City of Churches. Alternatively, South Australia could tax the pants off its citizens, employ more public servants and see if that works.

South Australian Premier Jay Weatherill can see all too clearly where this leads.

“This is meant to be one nation, not a series of competitive units,” he told journalists. “We’re talking about ripping up the underpinnings … of what makes Australia what it is.”

Well no, actually. Competition has made Australia what it is today, as Paul Keating successfully recognised. The commission is merely talking about ripping up the underpinnings of what makes South Australia what it is; that is, a mendicant state with more state public servants than manufacturing workers, that bludges about $1 billion a year in GST revenue from states that can still make a buck.

Weatherill says it is all about fairness, but one wonders how a tolling-paying NSW motorist feels about bailing out South Australia where, as a matter of principle, all the roads are free.

The commission’s submission on commonwealth-state relations offers a framework for genuine reform of federalism that would help restore a sense of purpose to state governments.

The Rudd experiment in extreme centralism has confirmed that the best policy decisions and the most efficient services are best delivered by the level of government closest to the intended beneficiaries.

Knowledge, as Friedrich Hayek wrote, “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess”.

Each tier of government should be sovereign in its own sphere, making it responsible for failures as well as successes, removing the opportunities for blame and cost shifting.

Vertical fiscal imbalance — the gap between the funds a state can raise itself and its overall expenditure — fell to its lowest point since World War II with the introduction of the GST, but across the past decade it has again been on the rise.

The commission contemplates correcting this in part by increasing the revenue stream from GST by removing exemptions and increasing the rate.

To close the gap further, while assisting the states to break their reliance on nuisance taxes, they could be invited to levy their own income tax. It would be collected on their behalf by the federal government to keep compliance and administration costs to a minimum. Reduced grants from Canberra would allow national income tax rates to be lowered so taxpayers would be no worse off.

Given the sensitivity of the GST issue, the federal government is unlikely to buy into this debate in the short term, but it has committed to white papers on federalism and taxation by the end of this term.

If the heat and noise over the debt and deficit debate die down, this is where the Abbott reform agenda could be headed.