Stop The Whingeing And Let's Make Federation Work

by Mike Steketee - The Australian

Michael Costa is a big bruiser of a bloke you wouldn't want to meet on a dark street - until you learn he is quite helpless.

The former Trotskyist, NSW Labor Council secretary and now NSW Treasurer was asked at his news conference on Tuesday's state budget whether NSW could meet the challenges of an ageing population. "The answer is no," he said.

You have to admire him for his frankness. His argument is that the NSW Government's revenue depends too much on inadequate federal funding to be able to pay for essential services, particularly health, as the population ages.

Costa describes the present carve-up of funding and responsibilities between the commonwealth and the states as unsustainable.

If it seems like an arcane topic, it also is fundamental to whether we remain a federation in anything other than name. Moreover, reforming federal-state relations has the potential to unlock another burst of the productivity that kicked the economy along in the 1980s and '90s.

But the prospects of Costa succeeding in the campaign he has launched do not seem bright. Failures litter the trail of federal-state relations over at least the past three decades. Peter Costello already has knocked back his proposal for a national summit on the financial implications of ageing. Costa now plans to host it himself. He also commissioned a report from the University of NSW's Neil Warren that highlights how the situation steadily is getting worse.

There always has been a great deal of political grandstanding in this debate, and Costa is doing his share of it. The budget deficit he has just promised for the next financial year, the inability to deal with the ageing of the population, and pretty well everything else short of the winter flu is Canberra's fault. But the system, or lack of it, encourages this kind of blame shifting.

Warren points out that the states raise only a little more than 30 per cent of their revenue, with the rest coming from Canberra. Only Austria among the federations he examined has less control over income. Why does this matter? Asking voters to pay taxes concentrates the mind wonderfully and it makes governments more careful about how they spend it.

The states' complaints that Canberra does not pay them enough is as old as Australian politics itself. It means that, when the failings of the Queensland hospital system are exposed and voters express outrage, Peter Beattie blames Canberra. If he were responsible for raising all the money he spent on health, he would not be able to pass the buck. Stripped of excuses, the first thing he would do is spend the funds more efficiently. Only then would he make the political judgment about whether Queenslanders were prepared to pay more taxes to get better hospital services.

The Howard Government says the states no longer can blame Canberra because it has given them access to a growth tax, in the form of all the proceeds from the GST. Indeed, GST revenues are now providing more money to the states than they would have received under the previous funding formula. But it also has worsened the imbalance between what the states spend and what they raise in taxes. This is because the states agreed to abolish some of their own taxes in return for the GST revenues.

Predictably, the states are still whingeing that they are being starved of funds because the GST proceeds are not growing fast enough. But ultimately the solution lies in their own hands. Some of the taxes they impose are narrowly based and inefficient and others, such as stamp duty, fluctuate wildly along with booms and busts in property and other asset markets. But Warren says state payroll taxes are relatively efficient because labour is so widely used in the economy. And so is land tax, with the supply of land not much affected by taxation.

He also points out that the efficiency of these taxes is reduced by the concessions governments give in the form of tax-free thresholds. In the case of payroll tax in NSW, this reduces the number of employees covered by more than half.

So if the states need more money, they can reduce the concessions. Sure that is hard to do politically, particularly since the states are competing with each other. But it is for them to make the political judgment.

If Costa is serious about reforming the system, he should discuss with his Labor mates in the other states levying income taxes. Isn't that the commonwealth's responsibility? Yes, but constitutionally the states have the power to impose income tax. The Fraser government actually legislated to allow the states to impose an income tax surcharge or give a rebate. None of the states took up the option. It was much easier to keep whingeing about Canberra's meanness while hanging on to its apron strings.

Costa also feels compelled on behalf of voters to kick up a fuss about the raw deal NSW gets from the Commonwealth Grants Commission, the independent body that determines the distribution of GST revenue between the states and territories. The commission's goal is to give each government equal capacity to provide services to its population. That means NSW and Victoria subsidise the states where it costs more to deliver the same standard of services.

NSW and Victoria complain that their money is going to Queensland and Western Australia, which are profiting from the resources boom. But, over time, the capacity of the mining states to raise extra revenue will mean the commission will be taking funding from them and giving it to NSW and Victoria.

That redistribution has been delayed because the commission uses a five-year moving average. And who was it that insisted on the five-year average rather than the three years favoured by the commission itself? None other than NSW and Victoria, because they argued it provided greater stability in their funding.

Costa has a strong case on the impossibly tangled mess of federal-state relations. The mismatch of revenue raising and spending and the shared responsibilities for expenditure, particularly in health, creates enormous waste and inefficiencies. If we are not prepared to make the federation work, we would be better off abolishing the states.