Thodey review #2 told to imagine a ‘bottom-up’ federation that rewards reformist governments

By Stephen Easton

Monday September 9, 2019

NSW Premier Gladys Berejiklian

The Berejiklian government says state governments should be rewarded for pursuing economic reform and given back a measure of their sovereignty through reforms to federal taxation arrangements.

The New South Wales government says its grip on the levers of power in the wealthiest state comes with the duty to lead a national discussion on the financial relationships that underpin the federation. There is also a sense that it feels hard done by.

To take charge of this, the NSW government recently lined up CSIRO chair David Thodey to lead an eclectic panel of reviewers: former federal department head Jane Halton; former deputy prime minister John Anderson; the nation’s favourite constitutional law guru, Anne Twomey; University of Melbourne economics professor John Freebairn; and New Zealand’s immediate past prime minister, Bill English.

“As the nation’s largest economy, it is incumbent on New South Wales to drive a renewed national conversation on a ‘bottom-up’ vision for federation that encourages dynamism, reform and opportunities to build a stronger economy, and supports the sovereignty of states in respect to funding decisions,” says the introduction to the panel’s newly released terms of reference.

Taxation powers have mostly been taken over by the federal government over the years, in line with the purpose of federation to distribute wealth evenly around the country, but the view in Sydney is that the system needs reform.

The Commonwealth taking most of the tax arguably makes life simpler for citizens but more difficult for state, territory and local governments, which deliver most of the public services.

From the NSW government’s perspective, the other side of the federation coin is “a complex mix” of funding arrangements to transfer that money back to the states and territories. It says this system provides “revenue streams that can be volatile and less efficient” and that means the state government’s spending depends on the “sustainability and reliability” of the flow of coin from federal coffers.

Issues for the reviewers to consider include the “design, complexity and number of funding agreements with the Commonwealth” and options for reform that would give NSW more long-term certainty with regard to its funding stream.

The Berejiklian government has told the panel it wants to encourage “a more dynamic form of federalism, rewarding state-led economic reform, and securing greater flexibility and autonomy for New South Wales” and asked them to come up with “a realistic assessment of feasibility and implementation issues, as well as a road map to overcome practical obstacles to successful reform”.

Another key goal is “more sustainable and predictable funding mechanisms” and the reviewers must take heed of three principles.

The first principle is that the money should be “distributed fairly across jurisdictions” but obviously the key question is who decides what is fair.

According to the NSW government, a fair system of distribution does two things; it “provides states with adequate financial reward for policy effort while ensuring that there are no ongoing competitive or fiscal disadvantages” at the same time.

Next, it says, the system must be more sustainable and predictable, with the following explanations:

  • Sustainable: to enable the efficient provision of services and infrastructure that is in line with community expectations, reflective of fundamental cost drivers, and in a way that allows states to use their experience and autonomy to delivery on reform goals.
  • Predictable: for recurrent expenditure that is stable over the economic cycle and provides certainty where there is an ongoing service need.

When looking at “the interactions between Commonwealth funding and the state tax system”, the panel will also have to apply five principles:

  • Lower: The objective of taxation is to raise the revenue needed to fund necessary services and infrastructure. Taxation imposes costs on both individuals and the economy as a whole. A lower tax burden would support economic growth and alleviate cost of living pressures.
  • Simpler: A tax system that is easy to understand would reduce complexity and compliance costs for individuals, households and business, freeing up taxpayers’ time and resources for more productive activities.
  • Fairer: A tax system needs to consider who pays taxes and whether the distribution is fair and equitable. Taxation changes should consider transitional impacts and the case for providing compensation if appropriate.
  • Efficient: An efficient tax system minimises impacts on economic growth by lowering reliance on taxes that distort decision making, discourage economic activity and impose high compliance costs.
  • Sustainable: A sustainable tax system has the ability to raise the revenue required to fund essential government services and critical infrastructure. This means that it is sustainable, stable and resilient to changes in market and industry structures.

The panel’s marching orders say it will consult other state governments along with external experts, if required, and run a general public consultation process.

It will produce a discussion paper in the second half of 2019, followed by a draft report and a final set of recommendations in the first half of 2020.

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