Improve Federalism By Cutting Duplicity

Worth A Look, Equalization, Frontier Centre

Federal Treasurer Peter Costello is both right and wrong in his desire for the federal Government taking over the economic functions of the states.

He is right that the states have squandered their substantial reform bonus. Since the introduction of the goods and services tax in 2000 the states have received about 20 per cent more than expected, equalling $70 billion in unanticipated revenue.

Instead of using their windfall to continue the process of reform and sustain the good economic times, they have expanded the size of government and increased the numbers and salaries of public servants.

A measure of the premiers’ profligacy is that despite the windfall of the GST three states, including NSW, are now running deficits.

While the premiers have talked the talk of reform, they have failed to walk the walk. The only reason there has been any reform at all at the state level is because the premiers are the recipients of financial bribes from the federal Government via the National Competition Policy.

For example, efforts to remove transport infrastructure bottlenecks — essential if our export performance is to be maintained — are caught up in endless meetings of federal-state committees. The Coalition’s efforts at improving workforce productivity through Work Choices have been opposed by Labor premiers campaigning hand-in-glove with the ACTU.

It’s no wonder that the Treasurer is frustrated. He has signalled that he refuses to sit on his hands and watch a once-in-a-generation opportunity wasted; even if taking this opportunity means fundamentally altering the balances in our system of government. He’s correct when he acknowledges that Australian federalism is a mess wracked with overlap and duplication, opaque lines of responsibility and petty power plays.

But the answer is not to junk federalism and turn the states into little more than glorified local councils, as Costello has implied. No level of government has all of the answers. The reform record of the federal Government can be as bad as that of the states.

For example, our media laws, which are in the exclusive control of Canberra, are a mishmash of confusions and half-baked compromises.

The task ahead is to strike a balance and recognise that the point of federalism is to limit the power of government and make it accountable. That is why the concept of federalism was once a central tenet of the Liberal Party, because the Liberal Party had a belief in small government. On the other hand, the Labor Party, believing in the power of unlimited government has always been implacably opposed to federalism.

Certainly, federalism can be improved by cutting back on overlap and duplication and ensuring clear lines of responsibility, and this is part of what the Treasurer has suggested.

A single approach to regulating infrastructure is appropriate, but the objective should not be just to pass control over to the commonwealth. The aim must be to shift ownership of infrastructure as much as possible into the more competitive private sector.

Public ownership of utilities and much of our infrastructure is inefficient and unnecessary, regardless of whether that ownership is in the hands of federal or state governments. State governments have long used utilities as de facto taxing agents, stripped them of cash and used the funds to prop their own state budgets. States could probably relinquish their decision-making authority over key infrastructure without doing too much damage to federalism.

But the Treasurer is wrong on tax. His idea that the federal Government should assume all taxing powers would only succeed in making the system worse. The real problem is not that the federal Government doesn’t have enough financial power, the problem is that it has too much.

In its long history the High Court has made some contentious decisions, nearly all of them in favour of the commonwealth at the expense of the states, but even a court with Lionel Murphy as chief justice would baulk at forbidding the states from using their constitutionally enshrined taxing powers. So the first issue the Treasurer would have with his plan is one of practicality.

The more fundamental question is: what would the elimination of state taxes do to the accountability of state governments? The states now get nearly half of their funds from the commonwealth, with the rest coming from taxes and charges that are hidden from most taxpayers. Premiers have precious little pressure on them to ensure they get value for money. Making the states entirely dependent on the commonwealth would only make the states even less responsible.

If only the federal Government levied taxes, then states would have no capacity to compete between themselves in relation to their tax rates. And in the 1980s it was competition between the states, particularly between NSW and Victoria, that led to many of the key reforms of the period.

That the Treasurer has flagged the federal Government should exit some areas of service delivery is an important acknowledgment that he appreciates reform of federalism is not a one-way street. In recent decades megalomania has encouraged federal ministers to meddle in the legitimate activities of state governments. The national interest is best served by having diversity in our education, health and welfare systems.

Maybe coming out of the debate about federalism will be a simple recognition that just because something is in the national interest doesn’t mean it should be run from Canberra.

Mike Nahan is a senior fellow at the Institute for Public Affairs in Melbourne, Australia.