John Hewson
Why federation reform should be an urgent priority

Before the pandemic, at most of my speeches to business and civil society groups, a question or comment was almost always made about why we don’t abolish state governments. The reasons were many and varied but all around a theme: a basic concern was that Australia is overgoverned; concern about the counterproductive consequences of the governance structures, in terms of blame and competition, or competitive federalism; that there are too many politicians; and that government is too expensive.

Reform has always been difficult, but more so now. State border closures have been seen by many as a significant retrograde step, harking back to the inefficiencies and disruptions of the days of separate rail gauges, but they have also been popular. The situation has been further complicated by the overlapping of responsibilities and unnecessary duplication in the bureaucracies engaged in the provision of government services, as well as the resistance to ensuring the consistency of regulations across borders in most policy areas.

Another complication from the pandemic has been the concept and role of the so-called national cabinet. It is not really a cabinet, nor is it fully representative. It was simply an initiative of a desperate prime minister wanting to ensure some engagement and relevance in the response to Covid-19. It was sold as a co-ordinating body, but it has clearly failed.

Essentially, national cabinet operates along the following lines: the states agree on a way forward on the various challenges, and then Scott Morrison announces it, writing his government into the process, trying to make it look as though he is in charge. This obviously resulted in some very real tensions within the federation, which Morrison has compounded by shirking or ducking clear responsibility.

For example, the Commonwealth has constitutional responsibility for quarantine yet he failed to underwrite purpose-built national quarantine facilities. Similarly with aged care, where Morrison sought to blame the states as Covid-19 ran amok, despite having clear obligations set out by the royal commission into the sector.

I must admit that I got very enthusiastic when Tony Abbott announced, as an early initiative of his government, that he would have two inquiries – one into the structure and operation of our federation and one into the tax system. It is important that these issues are looked at together – reform is a two-staged process, which first must agree on a structure of our federation, with a clear allocation of responsibilities, minimising duplication, and which then must consider the most effective and fair way to fund this structure.

Unfortunately, these Abbott inquiries never happened as initially announced. Although the federation review was established, it was soon terminated as it began to look like some of the issues could become politically difficult for his government. The terms of reference for the tax review were never issued, so that went nowhere.

Both issues have been left to drift. Our tax system has limped along with some very serious structural weaknesses, the reform of which is fast becoming an imperative. Discussions of the clear allocation of responsibilities to one level or other of government have identified a number of important criteria. For example, the effectiveness of service delivery.

As the states, not the Commonwealth, own schools and hospitals, it has been accepted that they should carry direct responsibility here, yet many feel we need a national framework to set and enforce national standards and a curriculum.

Of course, education extends well beyond schools, from preschool education through to universities, which are mostly state-owned. Again, it seems sensible that education overall should be a state responsibility. Indeed, it raises the obvious question as to whether we actually need a minister for education in the national government. Canada, for example, doesn’t have one – education is entirely a provincial responsibility. Similar considerations apply to hospitals. The scope to reduce duplication and to cut the costs of government significantly is potentially quite significant in these two areas.

Nevertheless, there are important exceptions. The Great Barrier Reef is a significant national asset, the responsibility for which should be national. Other areas are also clearly of national significance, such as industrial relations, transport regulation, climate, manufacturing industry and so on.

Aged care stands as a disturbing example of a lack of precision in the allocation of responsibility. The national government currently sets the policy and does the funding and regulation. Therefore, it has been seen to carry overarching responsibility. Several of the states used to own and operate nursing homes but sold or closed them. The Howard government’s Aged Care Act opened the door to more privatisation, which has been less than successful in terms of the quality, cost and availability of care, as well as putting pressure on – and creating – a wasteful bureaucracy.

In recent years concern has grown about the failures of governments in the delivery of essential services such as power and telecommunications, as well as health and aged care. In many cases these responsibilities have been abrogated to the private sector, which is driven more by profitability than cost-effective delivery of quality services.

Another contentious area has been climate change, where the failure of the national government to develop a relevant and deliverable policy has seen the states step up to fill the void. They have acknowledged a climate emergency, adopted net-zero targets, and funded technology development. The result – while positive at a state level – has been a mishmash of initiatives and considerable uncertainty for the private sector and its financiers.

Service delivery is another major issue. Most federal departments have no experience in it. This was most conspicuous during the pink batt scandal, where the Rudd government attempted to deliver that policy by relying on the federal Environment Department, which had no experience in service delivery. The results were disastrous. Morrison compounded these kinds of issues during his initial briefing to the national public service, where his instruction was that their primary role and responsibility was in service delivery rather than policy development, which he said was the domain of him and his ministers. Clearly neither the public service nor his ministers were qualified for these roles, most often with no coalface experience.

Federation reform is emerging as an issue for the next election. Anthony Albanese was asked about his plans in this respect at his recent address at the National Press Club, particularly as to the future of national cabinet. His response was most instructive: “... you can’t say that you want to work with states and territories and then impose things from the Commonwealth. But what you can do is engage in a spirit of goodwill. And can I say that I have spoken to premiers, not just Labor premiers, on an off-the-record basis, and you’d expect me to do that. We need a clearer delineation of who is responsible for what.”

Albanese seems to get it. He acknowledges the need for federation reform as part of what he calls “the growth agenda and the microeconomic reform and productivity agenda”. He has the experience to push a collaborative agenda that will inevitably require a deal with the states. But would it be a priority of an Albanese government? It certainly should be a priority of the next government – it would be overwhelmingly in our national interest. Going by Morrison’s past attitudes and actions, it is unlikely to be a priority for him.

Tax reform is complicated as both the Commonwealth and the states have tax bases and a couple of the state taxes, such as land and payroll, are potentially among the most effective tax bases but have been neutered in a process of competitive federalism where the states compete to attract people and business to their states.

Also, as politically clever as it may have been at the time for Howard to commit all goods and services tax revenue to the states, in practice it has only ensured what has become a yearly shit fight about its distribution. More than that, it is difficult to increase its coverage or increase the rate without the full agreement of the states. The GST is also a pressure point because it has not been the “growth tax” that the states had hoped, given that the spending it is levied on is growing less fast than the spending it is not levied on.

There are a number of other tax system complications and issues, including the overall resilience of the system; the sustainability of the profit-based corporate tax system; the many inequities favouring the wealthy, including on housing and superannuation; trusts; and the many corporates that don’t pay any tax. These and others are important in themselves, but they complicate overall systemic tax reform.

It is ridiculous to most Australians that our state and federal governments cannot work together in the national interest. The bottom line is problems don’t get solved. People are tired of weasel words, abrogated responsibility and the blame game. At a time when people are worried and stressed about their futures, the governments we elect need to remember who put them there and why.

This article was first published in the print edition of The Saturday Paper on February 5, 2022 as "On the levels".

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John Hewson is a professor at the ANU Crawford School of Public Policy and former Liberal opposition leader.

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