Give states more power, more revenue: former top bureaucrat

By David Donaldson

August 20, 2014

The Commonwealth should butt out of state-based service delivery, according to former senior Canberra bureaucrat Vince FitzGerald. The GST should be hiked and states assigned a proportion of income tax to pay for it.

FitzGerald, a self-described federalist and Melbourne director of ACIL Allen Consulting, argues “we have the most unbalanced federation in the world, with the lion’s share of the taxing power held centrally and used to ‘muscle in’ on areas which were constitutionally meant to be administered by the states — notably health and school education”.

He is critical of the Abbott government’s decision to pare back grants to the states for health and education over the next few years. “Without giving the states any enhanced ability to replace the funds,” he told The Mandarin, “the Commonwealth will hold back, it will push a significant part of its own budget problems onto the states.”

Mandarins are debating government relations and the division of responsibilities and funding as the federal government begins work on a white paper examining the federation. Last week, former top state bureaucrat Gary Sturgess told The Mandarin perverse incentives and blurred lines of responsibility are muddying the waters, but he called for greater co-ordination rather than a transfer of power.

FitzGerald has been secretary of the departments of Trade and Employment, a deputy secretary at Finance and a senior official in Treasury and Prime Minister and Cabinet. He is considered one of the architects of compulsory superannuation and has consulted at the state government level.

While he believes health is an area where Commonwealth-state co-operation will always be necessary — particularly given the Pharmaceutical Benefits Scheme will need to remain national — FitzGerald says the Commonwealth should play more of a “broad leadership role — focused mainly on setting national minimum standards in, for example, healthcare, monitoring outcomes achieved and promoting the spread of best practice”, rather than “conditionally and prescriptively funding many detailed programs”.

School funding is another area FitzGerald identifies as being in need of reform — currently private schools are primarily funded by the Commonwealth, while the states administer and provide the bulk of the money for public schools. “The federation would work a look better, now that the old ‘state aid’ debate is dead, if the funding of both private and government schools were put on a consistent basis and returned to the states, which would mean the states would need to have a greater revenue base to make up for that part of the funding of both sectors that the Commonwealth now provides,” he argued.

To address the shortfall in revenue, FitzGerald suggests the states should command a portion of the income tax — perhaps 10-20% — of that paid by citizens in each jurisdiction, but with each state free to add a surcharge or offer a rebate. There would still be one tax form and one collection agency — the Australian Taxation Office — and the Commonwealth would still set the progressive structure of the tax. He says this would be more sustainable than just increasing the GST, as it “would be constitutionally more secure, since it would be a state tax, whereas the GST is a Commonwealth tax” — though he is in favour of doing both.

What the white paper should examine

So what should the white paper look at? FitzGerald wants a “really good examination” of what we can learn from other federations.

“Canada and Germany,” he explained, “are two federations that have a more balanced arrangement between the centre and the provinces. In fact, in Germany there’s a constitutional mechanism for sharing revenues from the major tax bases with the Länder (states) on a basis related to relative responsibilities … There are also sensible arrangements for areas of shared involvement — ‘joint tasks’.”

The process should also look at the way “the delivery of the different components of the overall healthcare system can be better co-ordinated within regions”. FitzGerald argues Australia should be broken into “a number of catchments which are large enough to have within them all the components needed to deliver good healthcare”, adding there should be “a more integrated administration of those things in each such catchment, so that depending on the nature of the population in a catchment, the components of service delivery can be tailored to that population”.

He also sees road funding as an issue, arguing that “exactly what is a national road and what’s a state road and what’s a local road is very fuzzy”, making it difficult to divide responsibility, including with local government.

“Things are by no means completely broken in our federation, it just doesn’t run as well as it should.”

Noting there has been much discussion at COAG  over the previous decade about making funding arrangements more outcome-focused, FitzGerald points out there were around 90 specific purpose payments (now known as partnership agreements) then — there are now “over 140”.

“Those reforms were supposed to lead to the broadbanding of the many individual little special purpose payments that had existed into much broader ones,” he said. “The reverse has happened, despite all good intentions. There’s been a regrowth of numbers of agreements and of prescriptive provisions, rather than basing funding on achievement of outcomes, leaving the ‘how’ of that to the states.”

Nonetheless, he cites as an example of the spreading of good practice in state service delivery under COAG leadership the progressive adoption of the diagnosis-related groups (or DRG) funding model — “meaning that rather than funding hospitals based on reimbursing whatever it costs to run them, they would get a price per patient with a particular diagnosis, based on best practice costs”, so encouraging efficiency.

“The Commonwealth’s involvement has had some positive effects in that and other areas, but basically at the cost of a degree of inflation of bureaucracy at both ends and a certain amount of micro-management in areas that the states know better how to administer than the Commonwealth,” he said.

“There have been periods when COAG has worked very well, given all the constraints that exist. When there has been a spirit of co-operative partnership between the two levels of government you can achieve worthwhile reform. Things are by no means completely broken in our federation, it just doesn’t run as well as it should.”

More at The Mandarin: Federation foibles: ‘game playing’ in policy, says Sturgess

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