Federalism – where to from here?

Tim Pallas, Victorian Treasurer – 23 October 2017 – McKell Institute Victoria

For the last 26 years, Australia has enjoyed an uninterrupted period of economic growth. This is a success unparalleled anywhere in the world. While often overlooked, one of the drivers of that has been our federated system.

In a landmark study a decade ago, Anne Twomey and Glenn Withers concluded that when compared to more centralised systems, federal systems are more efficient and their societies more prosperous.

As former Premier John Brumby said, federalism encourages choice, customisation, competition, creativity, and co-operation.

It has allowed states to develop unique approaches to the policy challenges they each confront, and then allowed the best results of that innovation to flow across jurisdictions.

We’ve seen this with case-mix funding in our public hospitals, road safety campaigns, anti-discrimination measures, renewable energy schemes, and new service delivery models in disabilities and human services.

As a state, Victoria has a proud history of being the intellectual and political driver of Commonwealth-State reform.

In the constitutional referendums prior to Federation, it was Victoria that delivered overwhelming public support for the ‘yes’ vote.

It was the Kennett Government that pushed for the National Competition Policy – a landmark microeconomic reform.

In 2005, it was the Bracks Government that drove the National Reform Agenda. It ensured much needed changes in areas such as preventative health and early childhood development.

But for the benefits of federalism to be realised, states must be empowered and collaboration encouraged.

In 1900 when the Commonwealth of Australia Constitution Bill was introduced into the UK’s House of Commons by Joseph Chamberlain, the Secretary of State for the Colonies, he remarked:

“State rights have throughout been jealously preserved”.

Jealously preserved because the colonies and their delegates to Australia’s constitutional conventions understood that state governments would be best placed to look after the interests of their citizens.

The founders were clear in their desire to protect the distinct identities of the six colonies, and the powers of their respective parliaments.

Despite this, in the 116 years since, there has been a gradual expansion of the Federal Government’s role at the expense of the states.

It’s not the Federal Government’s job to take over state programs, or to impose lowest common denominator solutions on Australians. That is not what the founders of our federation intended. Rights were to be ‘preserved’.

There is an old joke about Canberra being ‘Moscow on the Molonglo’, but there is some seriousness to it. Our founders understood the breadth and diversity of Australia – they never intended it to be governed by a single monolithic state.

Are politicians in Canberra really best placed to develop policy for a hospital in Heyfield, or a school in Tarneit?

Do federal public servants ensconced in their taxpayer funded roundabout park really understand the needs of Victorian students and Victorian patients?

There is no substitute for hearing directly from those who are impacted by the decisions you make.

As a member of the Andrews Labor Government I am fortunate enough to drive on the roads we’ve built, send my children to the schools we’ve funded, and meet with the businesses we’ve supported.

So do my colleagues in Cabinet and Caucus. So do the talented public servants in my Department.

These experiences shape our policies and priorities – and are something a Sydney-centric Prime Minister doesn’t have the benefit of.

Visiting Victoria a handful of times each year; going from the airport to a marginal seat and perhaps posing for a selfie on a tram just doesn’t cut it.

There is also a serious bandwidth problem in the Federal Cabinet – with Ministers distracted by their leadership aspirations, their next Sky News appearance, or their possible foreign citizenships.

The Turnbull Government needs to focus on getting its core responsibilities right, instead of dictating to state governments how to run our schools, hospitals and infrastructure programs.

They obsess with telling states what to do in areas they have no practical experience whatsoever.

The Federal Government’s track record in service delivery speaks volumes. The last time the Federal Government tried to run a hospital it certainly didn’t end well for Tasmania.

And politeness means I won’t go anywhere near commenting on the disgrace that is the rollout of Malcolm Turnbull’s NBN.

State governments obviously aren’t perfect when it comes to policy development or service delivery – nobody is. But their scale, proximity to their communities, and localised set of responsibilities enable them to be more effective and more responsive.

Instead of empowering states, the Abbott-Turnbull Government has sought to marginalise them.

Nowhere has this been more evident than their chaotic and punitive approach to Commonwealth-State relations.

They are obviously not the first Federal Government to have brawls with the states. I haven’t forgotten the Howard Government’s record on water policy or the Rudd Government’s attempted takeover of hospitals.

But the current Federal Government seems to go out of its way to be unpredictable and unreliable.

All too often we learn of decisions through the front page of their favourite tabloid newspapers, which speaks volumes for the contemptuous way they treat the states.

The Federal Government provides little but a series of thought bubbles.

They unilaterally abolished the COAG Reform Council.

Then commissioned and promptly binned a White Paper on the Federation.

First there was talk of expanding the base of the GST.

Then there was talk of increasing the rate of the GST.

Then the Prime Minister mused about sharing income tax with the states – an idea that lasted all of 36 hours.

The Prime Minister wants to be agile, instead he acts like a policy weathervane – changing direction without warning.

Even once agreements have been signed, there’s still no certainty for state governments.

When states enter into national partnership agreements with the Federal Government, we trade off policy autonomy in exchange for access to a larger, more predictable funding pool.

We give the Federal Government a say in state policies and programs on the expectation that the funding it provides will continue. All too often though, agreements are abandoned and funding is withdrawn, while state governments are locked in to delivering these programs.

This is the worst of both worlds. We have no funding certainty and no policy flexibility.

How can state governments be expected to budget, plan and deliver services when this occurs?

As part of the agreements underpinning the NDIS, Medicare Levy revenue collected in the Disability Care Australia Fund was meant to start flowing to state governments in 2015. But the Federal Government has refused to hand over this money.

Similarly, the Federal Government refused to provide Asset Recycling money owed to Victoria following the Port of Melbourne transaction. Almost a year later, and with more politicking than was ever required, they agreed to hand over what was rightfully Victoria’s.

You’ll remember when Tony Abbott promised there would be no cuts to education or health and then – in his first Budget – cut $80 billion from schools and hospitals, including $22 billion from Victoria.

Not only was this done without any consultation but it went against existing agreements on schools funding and health reform. Agreements that underpinned long term planning in state systems.

The Federal Government makes some agreements uncertain by design. For example, the National Partnership on Early Childhood Education has only been extended in 12 or 18 month increments, making planning and delivery in the sector incredibly difficult.

We’ve seen the ‘Canberra knows best’ approach more recently the proposed National Housing and Homelessness Agreement.

It’s all very well for the Federal Government to propose expanding the scope of this Agreement but it must be supported by additional investment from them.

Without it, they are in effect spending the states’ money, undermining our fiscal and policy autonomy, and using the states strong budget positions as ballast for its increasing debt and deficit problems.

The Turnbull Government’s intervention in resources policy, with proposed GST penalties for states that have bans on fracking is an unprecedented intervention in state policy. It undermines the ability of the States to weigh-up the broader social, economic and environmental benefits.

Even with their energy plan last week, they cobble it together, then expect the states to simply get into line and accept it.

Similarly, Gonski 2.0 attempts to tie the hands of state Treasurers. In one Bill they abandoned the original Gonski reforms, sought to impose a one size fits all funding arrangement, and then booby-trap state budgets.

It’s just a national plan for a national plan’s sake, so the PM can say he’s done something, with the states picking up the tab.

Even more concerning than the chaotic ‘go it alone’ approach is that the federal government seems to have a real punitive streak.

Look at infrastructure funding. The Turnbull Government is providing only 10% of national infrastructure funding to Victoria, while sending an astonishing 45% to New South Wales. This equates to around a $7.5 billion shortfall in the five years to 2021.

Over 38% of national population growth over the last 3 years has been in Victoria, and we already make up a quarter of the nation’s population.

We also have the greatest population density – nearly three times that of NSW.

Our share of federal infrastructure funding is, by any estimation, manifestly unfair.

As a result of underestimates of Victoria’s true population, we were short-changed by $420 million of GST revenue over the past four years.

And now, the Federal Government is actively considering a proposal from the Productivity Commission it estimates could rip almost $1 billion in GST revenue from Victoria and send it to Western Australia, in this year alone.

There are some legitimate critiques to be made of the current formula for distributing the GST – but the government is looking at the wrong solution.

The idea of horizontal fiscal equalisation is that every state is given the ability to raise enough revenue to provide a similar level of services across the federation.

States with an above average ability to raise revenue get a lower share of the GST, and fiscally weaker states receive a larger share to ensure they can provide the services that Australians expect.

It’s a sound principle.

Now the Government is considering giving an increased share of the GST to states with a greater capacity to raise revenue, at the expense of states with less capacity.

This means the huge amount of money that flowed into WA at the peak of the mining boom would have been ignored for the purposes of GST calculations.

This punitive approach is all the more galling when you consider that Victoria has subsidized the Federation in every year of its existence – from kick-off in 1901 to today. In 2016 dollars, it has provided $86 billion of support to other states.

Indeed, we continued to contribute throughout those years when Victoria was maligned as a “rust bucket”.

And now, it is Victoria that is helping to bolster the Federal Government’s improved budget position.

Since the Andrews Government came to office, we’ve created more than 280,000 new jobs – the majority of them full time.

This is almost 40 per cent of the jobs that have been created nationally over this period. Similarly, growth in Victoria’s state final demand of 3.9 per cent in 2016-17 accounted for around 40 per cent of growth in national final demand.

The Commsec State of the States and Deloitte’s Business Outlook reports released today both confirm Victoria’s economy is thriving.

This strong growth translates directly to the federal budget through billions of dollars of income tax and corporate tax revenues, and lower welfare payments.

Despite this contribution, the only thing that seems to unite the Federal Government is a desire to treat Victorians as second class citizens.

The Federal Government continues to act as a handbrake on state governments – our reform agendas, and indeed in many ways, our progress.

Ultimately, something’s got to give.

I am pragmatic enough to know that we’re not going to be able to achieve single point accountability for the many areas of overlapping policy responsibility.

A federal takeover of hospitals as proposed by Kevin Rudd, isn’t realistic – but neither is abolishing Federal Health and Education departments as contemplated by Tony Abbott.

We can’t reverse a century of High Court decisions and restore all the states’ taxing powers.

We need to have a frank discussion about making the federation work within the constraints that exist today – within a system of fiscal imbalance, overlapping responsibilities and sometimes duplicated bureaucracies.

We should consider what structural fixes might help.

A good start would be for the Federal Government to start complying with the existing framework – the Intergovernmental Agreement on Federal Financial Relations, that all governments invested so much in developing.

We should explore ways of ensuring the Federal Government cannot unilaterally change agreements when it suits them. One way would be to have this enshrined in legislation.

This would give the states some confidence that the Federal Government would honour its commitments, and enable us to budget and plan more effectively.  At the very least, there should be some form of independent dispute resolution mechanism to avoid lengthy stand-offs when agreements aren’t honoured.

If the Federal Government continues to fail to engage with state governments in a meaningful way, through COAG and other bodies, then we must consider other options.

We should explore repurposing the Council for the Australian Federation – the states-only body established in 2006. The states could use that forum to agree what to cooperate on, and what to compete on – without the federal government in the room.

As I said earlier, the simple fact is that the Federal Government isn’t involved in the vast majority of service delivery. Schools, hospitals, public transport systems, and police forces are all managed by state governments.

This states only body could explore reforms on issues like transport regulation, energy policy and family violence prevention. There’s no reason a states only approach couldn’t be replicated at other Ministerial Councils like the Council on Federal Financial Relations.

We should also start to talk about more fundamental reforms, like amending legislation to require state governments agreement to the appointment of justices to the High Court, to ensure that the founders’ grand constitutional bargain is preserved.

And we should recognise that we need a cultural shift.

A more collaborative and cooperative approach is required from all sides.

An approach like we saw with the Victorian led National Reform Agenda.

Commonwealth-State relations is what economists term ‘a repeated game’. Lasting damage is done to mutual trust when unilateral actions go against conventions.

When there are sudden changes of direction, thought bubbles, or perceptions of inequity – it makes future negotiations harder and harder.

There needs to be a reset of the chaotic and punitive approach we have seen to date. States need to be treated by federal governments as partners, not serfs.

And there needs to be recognition from the Federal Government they are not always the smartest person in the room.

It’s time for the Federal Government to step up.

***

Tomorrow, Treasurer Morrison is delivering a speech on national productivity.

I want to take this opportunity to call on him to address the role that a well-functioning federation can play in lifting productivity across the nation – just as it has many times before.

He could also look to Victoria, where productivity has grown in real terms in the last two financial years.

Later this week I’ll be attending the Council on Federal Financial Relations with my Commonwealth and State counterparts.

There are a range of issues on the agenda that require genuine cooperation, that Australia needs to get right: from adapting wagering taxes to our online world, to increasing the supply of affordable housing.

I genuinely hope that we can begin a conversation about how to have a more collaborative approach to tackling the challenges Australia faces today. There’s never been a more important time for the Federation to work as intended.

At the Adelaide Constitutional Convention in 1897 Alfred Deakin said to the founders of our federation:

“We are trustees for posterity, for the unborn millions, unknown and unnumbered, whose aspirations we may help to fulfil and whose destinies we may assist to determine”

To fix our federation we need to bring back that focus on the long term, rather than the day-to-day political battles.

Of course, the Andrews Labor Government will continue to advocate for Victorian interests – we deserve our fair share.

But we will also advocate strongly for a federation that can deliver prosperity to all Australians – a federation underpinned by collaboration.

A federation that delivers certainty not chaos, fairness not favouritism. And perhaps most importantly, that celebrates its diversity.